First Majestic Silver Corp (TSX: FR) is engaged in the production, development, exploration and acquisition of mineral properties with a focus on silver production in Mexico. The Company’s assets include San Dimas Silver/Gold Mine, Santa Elena Silver/Gold Mine, La Encantada Silver Mine, La Parrilla Silver Mine, San Martin Silver Mine, Del Toro Silver Mine and La Guitarra Silver Mine. It also owns silver development projects in Mexico, being the La Luz Silver Project in San Luis Potosi State and La Joya Silver Project in Durango State, as well as a number of exploration projects in Mexico.

Investment Rationale

• Silver rally to Continue: Silver has been often overlooked in favor of its lustrous cousin, gold, but the price of silver has jumped over 74% in the last year. We believe the rally is likely to continue as the global economy reopens. Demand for the precious metal has shot up in the past 12 months. Silver was trading around USD 27 an ounce on Wednesday, a 74% rise from a year ago when the spot price was around USD 15.5 per ounce. From electronics to photography, jewellery and coins, silver is integral to numerous everyday products. Its high electrical conductivity and durability give an edge in industrial and technological applications, with almost every computer, mobile phone, automobile and appliance containing silver. The data show there has been more demand than supply of semi-precious metal so far in 2021.

• Strong Production Profile: The company has consistently increased its production profile over the years and expects annualized production of 30 to 33 million silver equivalent ounces at the end of FY21.

Source: Company

• Strong Technical Strength: FR shares are hovering in a steep bullish territory, as its shares have traded above the near-term, short-term and long-term support levels of 5-day, 10-day, 20-day, 30-day, 50-day and 200-day SMAs. This implies a strong bullish trend in the stock. Moreover, moving averages are also moving higher, which is another bullish indicator. Further, the leading momentum indicator, the Moving Average Convergence Divergence (MACD), is rising, and a crossover pattern is occurring, where the MACD oscillator is crossing over a 9-day SMA signal line. This is a strong bullish indicator. 14-day RSI is also hovering in a neutral zone, with a bullish bias at 59.9.

Technical Price Chart (as on June 10, 2021), Analysis by Kalkine Group

• Strong performance in Q1FY21: Given the gigantic rally in the silver prices over the past 1-year, First Majestic capitalized well on the higher underlying commodity prices and bolstered its financial health. During the quarter under review, the top line reported strong growth of 17% on a YoY basis, led by a 56% jump in the silver average realization price at USD 27.13/oz, and reported a net profit of USD 1.9 million as compared to a loss reported in year over period.

• Ample Liquidity: The company has adequate liquidity to fund its operations comfortability. Moreover, relative to the industry median, FR’s liquidity is significantly high, with the current ratio of 3.40x at the end of Q1FY21, whereas the industry median stood at 2.6x. This implies a strong business model generating higher free cash flow against the peer group.

• Robust Balance Sheet: The company has a robust balance sheet with a debt-equity ratio of 0.20x, with significantly strong debt protection metrics. The net Debt/EBITDA ratio stood at 1.2x, which implies negligible balance sheet risk. Moreover, the company has a net cash positive position at the end of the period.

• Risk Associated with Investment: The company is exposed to volatility in the underlying commodity prices, which can have a significant impact on the group’s financials. Further, the company is exposed to forex risk and interest rate risk as well.

Financial Highlights: Q1FY21

• During the first quarter under consideration, the group's Revenues totalled USD 100.5 million, or 17% higher compared to Q1 2020, including a record USD 4.8 million from silver coins and bullion sales from the Company's online retail store.
• The strong revenue growth was primarily due to a 56% increase in average realized silver price, partially offset by a 24% decrease in silver equivalent ounces sold. First quarter revenues included a record receipt of USD 4.8 million from the sale of 146,827 ounces in silver coins and bullion at an average silver price of USD 32.65 per ounce, or a premium of approximately 24% above the quarterly spot price of USD 26.25 per ounce. Revenue from the sale of coins and bullion in the first quarter more than doubled over the prior year.
• The Company reported mine operating earnings of USD 28.1 million, representing a 33% increase compared to USD 21.1 million in the first quarter of 2020. The increase in mine operating earnings was primarily attributed to higher metal prices.
• The Company reported net earnings of USD 1.9 million (EPS of USD 0.01) compared to net earnings of (USD 32.4) million (EPS of (USD 0.15)) in the first quarter of 2020. The increase in net earnings was primarily attributed to higher metal prices as well as a USD 22.7 million loss in the first quarter of 2020 related to mark-to-market adjustments on the Company's foreign currency derivatives.
• Adjusted net earnings for the quarter was USD 7.0 million (Adjusted EPS of USD 0.03) compared to USD 8.2 million (Adjusted EPS of USD 0.04) in the first quarter of 2020, after excluding non-cash and non-recurring items.
• Cash flow from operations before movements in working capital and income taxes in the quarter was USD 31.1 million (USD 0.14 per share) compared to USD 23.3 million (USD 0.11 per share) in the first quarter of 2020.
• Cash and cash equivalents on March 31, 2021, was USD 201.7 million. In addition, the Company had strong working capital of USD 232.8 million and total available liquidity of USD 297.8 million, including USD 65.0 million of undrawn revolving credit facility.
• Cash cost for the quarter was USD 12.61 per silver equivalent ounce, compared to USD 10.21 per ounce in the previous quarter.
• AISC in the first quarter was USD 19.35 per ounce compared to USD 16.12 per ounce in the previous quarter. The increase in AISC was primarily attributed to the increase in cash costs and sustaining costs being divided by 17% less silver equivalent ounces produced combined with a 14% increase in mine development rates.
• Total capital expenditures in the first quarter were USD 45.1 million, primarily consisting of USD 14.5 million at San Dimas, USD 14.3 million at Santa Elena (including USD 6.7 million towards the Ermitaño project), USD 2.7 million at La Encantada, USD 12.6 million for strategic projects and USD 0.9 million at non-producing properties.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 34.94% of the total shareholding. Sprott Mining Inc and Van Eck Associates Corporation. holds the maximum interests in the company at 11.30% and 8.7%, respectively. The institutional ownership in FR stood at 54%, and ownership of the strategic entities stood at 16%.

Valuation Methodology (Illustrative): EV to EBITDA based Valuation Metrics

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation: FR shares have significantly outperformed the benchmark index in the past 1-year, YTD, and 1-months. The relative outperformance stood at 25%, 13% and 12%, respectively. Also, prices of silver expected to remain elevated on the back of robust industrial demand for the metal, and we believe that the long-term demand for silver shows no signs of waning.

Silver is well placed for an upside from the current trading levels after the reopening of the global economy following the coronavirus pandemic, given a ramp-up in industrial production as well as sustained investment demand.

The higher underlying demand bolstered the group's financial strength in the first quarter of 2021, with Revenues generated in the first quarter totaled USD 100.5 million compared to USD 86.1 million in the first quarter of 2020, primarily due to a 56% increase in average realized silver price.

Further, the stock is trading in a bullish zone, with prices traded well above crucial short-term as well as long-term support levels of 50-day and 200-day SMAs, and leading momentum indicator MACD is rising with 14-day RSI hovering in a neutral zone with a bullish bias.

Hence, based on the aforementioned facts and valuation, we recommend a 'Buy' rating on the stock at the closing price of CAD 22.18 on June 10, 2021.  

1-Year Technical Price Chart, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

*Recommendation is valid at June 11, 2021 price as well.

Disclaimer

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