First Majestic Silver Corp.

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

Key Highlights:

• Encouraging production growth: The company reported a 14% y-o-y rise in its Q3FY21 production at 7.3 million silver equivalent ounces, which includes 3.3 million ounces of silver and 54,525 ounces of gold. The growth was primarily attributable to a 39% y-o-y increase in gold production from the Jerritt Canyon operation in Nevada.
• Operational Highlights: During the quarter, the company reported completion of 50,472 metres in exploration drilling within the company’s mines, which includes 27 exploration drill rigs. Additionally, the company conducted extracting mineralized material from Ermitaño deposit at Sant Elena, wherein, the group reported 45,271 tonnes of mineralized material grading 4.0 g/ton of gold and 41 g/ton of silver, which have been placed in surface stockpiles. The management highlighted that it would conduct an initial batch test processing at the Santa Elena processing plant.
• Favorable Macros: The company derives a majority of its revenue from silver, and the demand for the metal is likely to stay 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 level of urban and rural coverage nationwide.

Source: Company Presentation 

Q2FY21 Financial Highlights:

• FR impresses with its quarterly result, wherein the group reported a revenue of USD 154.073 million, jumped from USD 34.855 million in the previous corresponding period. The increase was driven by a strong performance from both silver and gold segment.
• Mine operating earnings stood at USD 29.423 million, as compared to a loss of USD 7.762 million in Q2FY20. The growth was primarily driven by higher revenue, partially offset by a higher mine operating cost.
• Operating earnings stood at USD 16.354 million, as compared to a loss of USD 27.387 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.
• The company turned profitable and reported net earnings of USD 15.599 million, as compared to a net loss of USD 9.968 million in pcp.

Q2FY21 Income Statement highlights (Source: Company Report)

Risks: Volatility in the gold and silver prices are likely to affect the company’s income, cash flows and margins. Moreover, the company reported a constant increase in total debt and the continuation of the above trend would dampen the company’s overall financial flexibility. 

Valuation Methodology (Illustrative): Price to Earnings

Stock Recommendation:

The company reported improved working capital management and reported quick ratio and current ratio of 2.69x and 3.08x, respectively, in Q2FY21. These were higher than the industry median of 1.52x and 2.79x, respectively.  We have valued the stock using the Price to CF 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 MAG Silver Corp, Altius Minerals Corp etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 15.45 on October 19, 2021.

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

Technical Analysis Summary

One-Year Technical Price Chart (as on October 19, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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