First Majestic Silver Corp. (TSX: FR) is a mining company, focused on silver production in Mexico and is aggressively pursuing the development of its existing mineral property assets. The Company presently owns and operates the San Dimas Silver/Gold Mine, the Santa Elena Silver/Gold Mine and the La Encantada Silver Mine.

Key highlights

• Achieved record quarterly production in Q4 2021: The company recently stated that its fourth-quarter production, which stood at 8.6 million silver equivalent ounces, comprised of 3.4 million silver ounces and 67,411 gold ounces, setting a new quarterly record, indicating a 17% increase over the previous quarter. Furthermore, total production for the full year of 2021 hit a new Company high of 26.9 million silver equivalent ounces, consisting of 12.8 million silver ounces and 192,353 gold ounces, a 32 percent increase over 2020.

• Robust guidance for FY2022: The business also stated that it expects to produce 32.2 to 35.8 million silver equivalent ounces in 2022, consisting of 12.2 to 13.5 million ounces of silver and 258,000 to 288,000 ounces of gold, with AISC cost guidance of between USD 16.79 to USD 18.06 per silver equivalent ounce.

• Bullish industry scenario: Majority of the company’s revenue comes from silver, and the demand for the above metal is likely to remain elevated in the coming days supported by its abundant usage across several industries 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 level of urban and rural coverage nationwide.

Source: Company presentation

• Elevated commodity prices to support future earnings: Despite recent volatility in commodity prices, the firm is doing well, and we can observe a substantial influence of this movement on the balance sheet of precious and industrial metal mining companies. As prices rise, average realization prices for miners rise, resulting in a greater margin profile, higher free cash flow generation, and balance sheet deleveraging. We believe the firm is well positioned to profit from rising underlying commodity prices and end FY2021 in good financial shape.

• Investing for future growth: The Company intends to invest USD 207.8 million on capital expenditures in 2022, with USD 86.3 million going toward sustaining investments and USD 121.5 million going toward expansionary initiatives. In 2022, the Company plans to enhance underground development to roughly 53,700 meters, up from 50,559 meters in 2021. Furthermore, it plans to boost exploration drilling by 41% in 2022, to roughly 320,200 meters, compared to 227,845 meters in 2021. We anticipate that increased exploratory activities will result in more stable production results, resulting in higher cash flows for the company.
  

• Strong liquidity profile: In Q3 2021, the company's quick ratio was 2.39x compared to the industry median of 1.50x, while the current ratio stood at 2.91x against the industry median of 2.62x. These higher ratios against the industry indicates that the company's short-term obligations are growing at a slower pace, compared to its resources to cover them, which is a good indication.
  

Risks associated with investment: The performance of the company is directly correlated with the metal prices. Thus, volatility in the commodity price would dampen the company’s income and would take a toll on the overall performance. 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. 

Financial overview of Q3 2021 in thousands of CAD

Source: Company Filing

• Total production: During the quarter, total production was of 7.3 million silver equivalent ounces, consisting of 3.3 million ounces of silver and 54,525 ounces of gold, representing an increase of 1% and 17%, respectively, compared to the previous quarter primarily due to a 39% increase in gold production from the Jerritt Canyon operation in Nevada.
• Stagnant revenues: In Q3 2021, the company reported a revenue of USD 124.6 million, compared to USD 125.8 million in the previous corresponding period. The slide was primarily due to lower income from the silver segment (USD 43.1 million v/s USD 85.4 million in pcp).
• Lower mine operating earnings: The company clocked minimized mine operating earnings, which stood at USD 3.5 million compared to USD 48.0 million in Q3FY20, primarily due to higher cost of sales and an increase in depletion, depreciation, and amortization cost.
• Operating losses: In the reported period the company’s operating loss stood at USD 10.9 million, as compared to a profit of USD 37.7 million in pcp. The period was marked by a surge in general and administrative expenses and share-based payments.
• FR reported a net loss of USD 18.4 million in Q3 2021, compared to a net profit of USD 30.9 million in pcp., primarily due to above stated reasons, partially supported by deferred tax recovery.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which forms around 35.97% of the total shareholding. Sprott Mining Inc and Van Eck Associates Corporation hold the company's maximum interests at 11.08% and 9.30%, respectively. The company's institutional ownership stood at 32.03%.

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

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation

The company just announced its Q4 2021 production results, which were 8.6 million silver equivalent ounces, made up of 3.4 million silver ounces and 67,411 gold ounces, a new quarterly high and a 17% increase over the previous quarter. In addition, total output for the full year of 2021 reached at a new high of 26.9 million silver equivalent ounces.  Furthermore, the company's morale has been bolstered by these results, and the company has provided a strong guidance for FY2022, stating that it intends to produce 32.2 to 35.8 million silver equivalent ounces, which is a significant positive. Additionally, the demand for silver is likely to increase, owing to its widespread use in a variety of industries.

The corporation is significantly investing in expansionary projects, with the expectation that expanded exploratory activity will result in more consistent production results and better cash flows. This program is backed up by the company's solid liquidity. Furthermore, higher commodity prices, a better business risk profile, higher commodity output, and higher realization prices are likely to help the company achieve healthy revenue growth in the medium term. Therefore, based on the above rationale and valuation, we recommend a "Buy" rating on the stock at the closing price of CAD 14.07 at 10:27 am Toronto time on January 21, 2022.

One-Year Technical Price Chart (as on January 21, 2022). Source: REFINITIV, Analysis by Kalkine Group

Technical Analysis Summary

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest. 

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest. 

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices 

Note 1: The reference data in this report has been partly sourced from REFINITIV. 

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.