First Majestic Silver Corp.

First Majestic Silver Corp. (TSX: FR) is a mining company that produces metals like silver and gold and mines in Mexico. The company is also pursuing several exploration and development activities across the North American region.

Key Highlights

• Favorable Macros: The company derives a significant part of its revenue from silver. The demand for the metal is likely to remain elevated in the coming days due to its application in several avenues like electric vehicles, manufacturing of Solar Panels in renewable energy etc. Additionally, as per the US Department of Energy’s National Renewable Energy Laboratory, the country would require 8,000 solar carport stations to provide a minimum of urban and rural coverage nationwide.

Source: Company Presentation

• Positive Technical Indicators: On the daily chart, the FR stock closed near the lower range of the 20-day Bollinger band, indicting a possible up move from the current level. Moreover, the 14-day RSI is hovering near its oversold zone of 31.4941, further providing room for price appreciation.

Technical Price Chart (as on December 02, 2021). Source: REFINITIV, Analysis by Kalkine Group

• Impressive FY21 Guidance: For FY21, the company expects its silver production to range between 13.0 to 13.8 million ounces, compared to 11.59 million ounces in FY20. Moreover, gold production is expected to range from 181 to 194 thousand ounces, higher than 100.081 thousand ounces in the previous year.

FY21 Production Guidance (Source: Company Presentation)

• Prudent Working Capital Management: In Q3FY21, the group reported its quick ratio and a current ratio of 2.39x and 2.91x, respectively, compared to the industry median of 1.51x and 2.59x, respectively. The above indicates that the company efficiently uses its current assets to meet its short-term liabilities. Additionally, the group recently announced the issuance of senior convertible notes for USD 230 million, due in 2027. The above would be used for general corporate purposes, including possible strategic opportunities.
  

• Q3FY21 Operational Update: During Q3FY21, the group completed a total of 79,066 m in exploration drilling activity within its mines. Notably, 27 exploration drill rigs were active, including 12 rigs at San Dimas, six at Jerritt Canyon, seven at Santa Elena, and two at La Encantada.
  

• Higher Gold Production to Support Upcoming Performance: In Q3FY21, the company reported 54,525 ounces of gold production, reflecting a 17% jump over the previous corresponding period, driven by a 39% higher output from the Jerritt Canyon operation in Nevada. Gold production for 9MFY21 was at 124,942 ounces, reflecting a 69% change over the previous period. Notably, the company invested USD 15 million for capital projects during the quarter, including roaster upgrades and expansion lift at the tailing’s facility. As a result, the management expects its gold production to reach ~200,000 Au ounces by 2024, subsequently supporting its overall performance.
  

• Attractive Prospects from Ermitaño Mine: During the quarter, the corporation conducted 45,271 tonnes of mineralized material grading 4.0 g/t gold and 41 g/t silver from the Ermitaño mine in Santa Elena. The management reported high grade Stockpiling from the above mine and discovered a ~59% increase in Proven and Probable Mineral Reserves of 51 million silver equivalent ounces. The group expects its initial production in early 2022 from the above project.

Q3FY21 Financial Highlights

• Marginal Slide in Topline: The group reported a revenue of USD 124.646 million, compared to USD 125.881 million in the previous corresponding period. The decline was primarily due to lower income from the silver segment (USD 43.154 million v/s USD 85.426 million in pcp).

• Decline in Mine Operating Earnings: Mine operating earnings stood at USD 3.518 million, compared to USD 48.033 million in Q3FY20. The slide was primarily driven by a higher cost of sales and an increase in depletion, depreciation, and amortization costs.

• Reported an Operating Loss: In Q3FY21, the company posted an operating loss of USD 19.801 million, compared to a profit of USD 44.339 million in pcp. The period was marked by a surge in general and administrative expenses and share-based payments, while mine holding costs remained lower than the previous corresponding period.

• Posted a Net Loss: The company reported a net loss of USD 18.406 million, compared to a net profit of USD 30.946 million in pcp. The above was primarily due to an operating loss, partially offset by an income tax recovery of USD 1.395 million, versus an income tax of USD 13.393 million in pcp.

Q3FY21 Income Statement Highlights (Source: Company Report)

Risks Associated with Investment

Volatility in the international gold and silver prices are likely to affect the company’s income, cash flows and margins. Moreover, the company reported a constant increase in input costs, which has resulted in higher cash costs and suppressed profitability. Continuation of the above trend would hinder the upcoming performance.

Top-10 Shareholders

The top ten shareholders of the company together hold approximately 36.78% stake. Sprott Mining Inc and Van Eck Associates Corporation are the major shareholders in the company with an outstanding position of 11.08% and 10.18%, respectively.

Source: Refinitiv

Valuation Methodology (Illustrative): EV to Sales

Stock Recommendation

The company focuses on improved cost management through unlocking value at the Jerritt Canyon mine through higher exploration and development rates, which would subsequently increase production and lower input costs, supporting the upcoming margin. Additionally, FR also expects higher production and lower operating costs from its San Dimas mine by installing a new 3,000 tpd HIG mill. We expect the price of silver and gold to remain elevated in the coming quarters due to the ongoing volatility within the global capital markets on account of the resurgence of the COVID-19 virus.

We have valued the stock using the EV to Sales based relative valuation method and have arrived at a double-digit upside (in percentage terms) upside. For the said purposes, we have considered peers like Endeavour Silver Corp, Altius Minerals Corp etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of FR at the last traded price of CAD 14.16 on December 02, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached

One-Year Technical Price Chart (as on December 02, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

*Recommendation is valid on December 03, 2021, price as well.

Disclaimer

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