Summary
First Majestic Silver investors have seen a massive reversal of fortune this year, with the stock now down 55% from its year-to-date highs.
While the company has seen a sharp increase in revenue this year from higher silver prices and its recent acquisition, margins have suffered, with AISC margins below the peer average.
Meanwhile, even with the stock down 55% from its highs, the stock still trades at a hefty premium to fair value, offering little margin of safety to investors.
So, while First Majestic does offer a solid growth profile if it can execute successfully at Jerritt Canyon, I believe there are several more attractive ways to play the sector.
style-photography/iStock via Getty Images It’s been a rough year for investors in the Silver Miners Index ( SIL ), with the index down over 20% year-to-date after starting the year by massively outperforming the S&P 500 ( SPY ). First Majestic Silver ( AG ) was briefly a sanctuary from the carnage earlier this year, but its performance has reversed, with the stock now down over 20% year-to-date and 55% from its highs. However, even after this massive correction, there’s still no margin of safety here for new investors, with the stock sitting at ~4.0x P/NAV. So, while First Majestic does offer a solid growth profile if it can execute successfully at Jerritt Canyon, I believe there are several more attractive ways to play the sector. (Source: Company Presentation)
Last month, First Majestic Silver released its Q3 results, reporting quarterly production of ~7.3 million silver-equivalent ounces [SEOs], a more than 40% increase from the year-ago period. However, the company saw a decline in revenue year-over-year due to withholding some sales from the market. This may have paid off if the company sold this inventory into the brief rally we saw in November. Still, with silver prices continuing to languish, the company is set up for another softer quarter from a margin standpoint, and margins have slid year-over-year with the company now operating the higher-cost Jerritt Canyon [JC] Mine. Let’s take a closer look below: (Source: Company Filings, Author’s Chart)
As shown below, First Majestic has seen a massive increase in revenue year-to-date relative to FY2019 levels, with first-nine-month revenue coming in at ~$379 million, up from ~$268 million in the first nine months of 2019. This has been helped by higher production (JC Mine acquisition) and higher metals prices, and is despite withholding silver sales in Q3. On a full-year basis, revenue has come in well above pre-COVID-19 levels, and the company is set up for a much stronger year in 2022, with a full year of contribution from its new JC Mine in Nevada. Meanwhile, the company has also seen a nice boost to its jurisdictional profile, adding a #1 jurisdiction to its arsenal. (Source: Company Filings, Author’s Chart)
However, as the chart above shows, we have seen a material increase in costs, with FY2019 all-in sustaining costs coming in below $13.50/oz and FY2021 AISC guided to come in at ~$18.25/oz. As I discussed in a prior article , this is partially due to increased investment this year with a major capital project at the JC Mine. This is due to the company spending to optimize this operation, including a new management team, and over $15 million capital projects alone in Q3 (roaster upgrades, tailings expansion lift). Meanwhile, the mine is currently operating well below its capacity (4,500 tonnes per day), opening up the mine to meaningful production growth at minimal extra costs, resulting in much lower costs at the mine. So, while the costs are up sharply, they should improve slightly in FY2022. (Source: Company Technical Report)
Unfortunately, the offset to these improved costs next year is that inflationary pressures continue to worsen sector-wide, with even some of the largest producers forecasting a 5% increase in costs. Even though First Majestic is investing to reduce costs (HIG Mill, LNG plant), it is not immune to these pressures. In addition, I was expecting a much more robust economic study from Santa Elena with the inclusion of Ermitano, and the recent announcement came in well below my estimates. Given the impact of worsening inflationary pressures combined with a strong Mexican Dollar and US Dollar ( UUP ), I am less confident in a sharp decline in costs next year. (Source: Company Presentation)
As noted, First Majestic released a Pre-Feasibility Study at Santa Elena, which includes Ermitano, and the mineral reserve base has increased by 59% to ~51 million silver-equivalent ounces, with a […]
source First Majestic Silver: Still Trading At A Hefty Premium To Fair Value
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