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

• Record quarterly production in Q4 2021: On January 18, 2022, the company stated 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 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 (All-in Sustaining Cost) AISC cost guidance of between USD 16.79 to USD 18.06 per silver equivalent ounce.

• Bullish industry scenario: The majority of the company’s revenue comes from silver, and the demand for white 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 

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 mn of USD

Source: Company Filing 

• 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).
• 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.
• 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 the above-stated reasons, partially supported by deferred tax recovery.

Valuation Methodology (Illustrative): EV to EBITDA based

*1USD=1.28CAD

Analysis by Kalkine Group

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 a new high of 26.9 million silver equivalent ounces.  Furthermore, the company's morale has been bolstered by these results, and it has provided 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. Therefore, based on the above rationale and valuation, we recommend a "Hold" rating on the stock at the closing price of CAD 14.85 as on February 18, 2022.

One-Year Technical Price Chart (as on February 18, 2022). Source: REFINITIV, Analysis by Kalkine Group

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

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