Fresnillo PLC (LON:FRES) has been downgraded to ‘underweight’ from an ‘equal-weight’ recommendation by Morgan Stanley due to uncertainty over the proposed mining legislation in Mexico.
Analysts at the investment bank said they see a possible impact of up to 11% on the group’s earnings as a result of nine recent bills introduced in Mexico.
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Morgan Stanley said that two further bills have now been proposed that could have a larger impact than the previous nine, with the cancellation of existing mining concessions now possible if certain clauses are contravened.
Its analysts said that there is no indication that Fresnillo would be in breach of any of these terms, but that the changes proposed present uncertainty, and until there is greater clarity on the potential outcome of these bills, it thinks Fresnillo's share price could separate from fundamentals.
“Our move reflects the impact from any rise in mining industry risks on Fresnillo, as it currently trades on a premium valuation vs peers, in part driven by the market viewing Mexico as a favourable jurisdiction for mining. With uncertainty introduced, we see scope for a de-rating and for this premium to contract pending further clarity,” Morgan Stanley analysts said in a note to clients.
“Fresnillo's share price has risen about 10% since the announcement of these bills, so is not appearing to price much risk yet. For now, we reflect this increased risk by resetting our price target at a level between our bear case and our bull case, reflecting our view of the increasing likelihood of a bear case scenario, including a rising tax burden,” they added.
The investment bank also cut the Mexican miner’s target price to 715p from 1,100p
Shares in Fresnillo were 11.2% down at 810.0p in mid-afternoon trade.