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

• Stellar production numbers for Q1 2022: The company generated 7.2 million silver equivalent ounces, which included 2.6 million ounces of silver and 58,892 ounces of gold. Total output rose by 59% as compared to the first quarter of 2021, owing mostly to the acquisition of Jerritt Canyon.

• Great performance from Ermitaño mine: The Company processed 114,190 tonnes of ore from the Ermitaño mine at the Santa Elena processing plant during the quarter, a 10% increase over the previous quarter. The increased quantities were caused by the mine's rapid underground construction as it begins its scheduled ramp-up in 2022.The Company anticipates higher production rates as new production stopes are prepared and brought into production by year end.

• Robust guidance for FY2022: The business also foresees a growth of 30% in its consolidated production in FY 2022, compared to 2021 and would 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.

• 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.
  

• Curbing AISC cost: The Company expects its 2022 AISC in between USD 16.79 and USD 18.06 per consolidated payable silver equivalent ounce. Excluding non-cash considerations, the Company expects its 2022 AISC to be between USD 16.34 and USD 17.56 per payable silver equivalent ounce. Below is an itemized AISC cost chart. We believe this reduction in cost will boost the margins of the company, which is a big positive. 

• Minimizing average collection period: In FY 2021, the company reported lower average accounts receivable day of 31.4 days, against the industry median of 32.4 days. Also, accounts receivables days reduced on the sequential basis, which is a key positive. A lower average collection period indicates that the organization is collecting its payments at a faster pace. This helps in having enough cash on hand to meet their financial obligations.

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 FY 2021 (In 000 of USD)

Source: Company Filing

• Record annual revenues: The company generated record annual revenues of USD 584.1 million in 2021, 61% higher than the previous year primarily due to the addition of the Jerritt Canyon Gold Mine during the second quarter coupled with a 32% increase in payable silver equivalent ounces sold and 19% increase in the average realized silver price.

• Steady mine operating earnings: In 2021, the company recognized mine operating earnings of USD 101.4 million compared to USD 105.1 million in 2020. The decrease in mine operating earnings was primarily driven by higher costs at Jerritt Canyon to prepare the mine for higher throughputs and improved plant performance.

• Higher operating earnings: In the reported period the company’s operating earnings stood at USD 49.2 million, compared to USD 40.3 million in pcp. The period was marked by a surge in general and administrative expenses and share-based payments.

• Higher income tax eroded the profit: FR reported a net loss of USD 4.9 million in FY 2021, compared to a net profit of USD 23.0 million in pcp., primarily due to higher income tax expense.
  

Top-10 Shareholders 

The top 10 shareholders have been highlighted in the table, which forms around 33.95% of the total shareholding. Van Eck Associates Corporation and Sprott Mining Inc hold the company's maximum interests at 10.00% and 8.09%, respectively. The company's institutional ownership stood at 32.95%.

Stock recommendation 

The Company generated record revenues totaling USD 584.1 million in 2021, primarily due to the addition of the Jerritt Canyon Gold Mine during the second quarter of FY 2021, coupled with increase in payable silver equivalent ounces and higher average realized silver price.

Moreover, the company's morale has been bolstered by these results, and it 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. Recently the company shared its Q1 2022 production numbers which increased 59% when compared to Q1 2021 primarily due to the acquisition of Jerritt Canyon. Furthermore, it is focusing to bring down cost, which would help in elevating margins, another positive aspect.

Additionally, the demand for silver is likely to increase, owing to its widespread use in a variety of industries. Therefore, based on the above rationale and valuation, we recommend a "Buy" rating on the stock at the last closing price of CAD 12.66 as on May 5, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on May 05, 2022). Source: REFINITIV, Analysis by Kalkine Group

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

Technical Analysis Summary

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