Over the past few months the stocks in the gold and silver mining sectors have fallen dramatically. This has provided an excellent opportunity to investigate companies in these sectors for investment purposes. One company worth considering is First Majestic Silver Corporation (AG). While there are many different factors to look at and consider when investing, in the article below I will look at the debt side of the company. I will analyze First Majestic's total debt, total liabilities, debt ratios and WACC. From this analysis we should get an idea if the company is highly leveraged, how much it is paying for its debt, what it's paying in taxes and how much to expect in return for investing in this company over the long term.
Gaining knowledge about a company's debt and liabilities is a key component in understanding the risk of a company. In 2008 and 2009 we were able to see some of the repercussions that highly leveraged companies with large amounts of debt succumbed to. Taking into account the debt side of a company might not reveal the "pop" on the upside that an investor would like, but it will help ensure that the company is able to keep its capital and use it for growth in the future.
First Majestic Silver Corp. is a company committed to building a senior silver producing mining company. The company's plan is based on an aggressive development and acquisition approach with a focus on Mexico. Currently, the company owns and operates five producing silver mines in Mexico.
Map sourced at (company website)
In the article below, I will calculate important ratios in understanding the amount of debt and liabilities the company has incurred. From this analysis we will understand more about the company's debt, liabilities and financial risk. If this summary is compared with other companies in the same sector such as Coeur D'Alene Mines Corporation (CDE) or Silver Standard Resources (SSRI) you will be able to see which company has the most debt, thus adding to the company and investor risk.
1. Total Debt = Long-Term Debt + Short-Term Debt
Total debt is the sum of long-term debt, which is debt that is due in one year or more, and short-term debt, which is any debt due within one year.
- 2008 - $2 million + $14 million = $16 million
- 2009 - $4 million + $4 million = $8 million
- 2010 - $2 million + $1 million = $3 million
- 2011 - $10 million + $5 million = $15 million
- 2012 - $14 million + $15 million = $29 million
First Majestic's total debt has increased over the past five years. In 2008 First Majestic posted a total debt of $16 million while in 2012 the company posted a total debt of $29 million. This signifies an increase of 81.25%.
2. Total Liabilities
Liabilities are a company's legal debts or obligations that arise during the course of business operations, so debts are one type of liability, but not all liabilities. Total liabilities are the combination of long-term liabilities, which are the liabilities that are due in one year or more, and short-term or current liabilities, which are any liabilities due within one year.
- 2008 - $61 million
- 2009 - $50 million
- 2010 - $66 million
- 2011 - $93 million
- 2012 - $220 million
Just like the total debt the liabilities have also increased over the past five years. In 2008, First Majestic reported liabilities at $61 million while in 2012 First Majestic reported liabilities at $220 million. This marks an increase of 260.65%.
In analyzing First Majestic's total debt and liabilities, we can see that the company currently has a total debt of $29 million and has liabilities at $220 million. From the numbers above, we can see that over the past five years First Majestic's total debt has increased by 81.25%, while the total liabilities have increased by 260.65%. As the company's amount of debt and amount of liabilities have increased, the next step will reveal if the company has the ability to pay them.
1. Total Debt to Total Assets Ratio = Total Debt / Total Assets
This is a metric used to measure a company's financial risk by determining how much of the company's assets have been financed by debt. It is calculated by adding short-term and long-term debt and then dividing by the company's total assets.
A debt ratio of greater than 1 indicates that a company has more total debt than assets. Meanwhile, a debt ratio of less than 1 indicates that a company has more assets than total debt. Used along with other measures of financial health, the total debt to total assets ratio can help investors determine a company's level of risk.
- 2010 - $3 million / $321 million = .01
- 2011 - $15 million / $443 million = .03
- 2012 - $29 million / $813 million = .04
First Majestic currently has a total debt to total assets ratio of .04. The total debt to total assets ratio has increased over the past three years. As the total debt to total assets ratio has increased, this indicates that since 2010, the company has added more total debt than assets. As the number is currently well below 1, this indicates that the company has more assets than total debt. Because this number is very low, this metric indicates very low financial risk to the company.
4. Debt ratio = Total Liabilities / Total Assets
Total liabilities divided by total assets. The debt ratio shows the proportion of a company's assets that is financed through debt. If the ratio is less than 0.5, most of the company's assets are financed through equity. If the ratio is greater than 0.5, most of the company's assets are financed through debt. Companies with high debt/asset ratios are said to be "highly leveraged." A company with a high-debt ratio or that is "highly leveraged" could be in danger if creditors start to demand repayment of debt.
- 2010 - $66 million / $321 million = .21
- 2011 - $93 million / $443 million = .21
- 2012 - $220 million / $813 million = .27
In looking at First Majestic's total liabilities to total assets ratio over the past three years, we can see that this ratio increased in 2012. The ratio has increased from .21 in 2010 to .27 in 2012. As the 2012 numbers are still below the 0.50 mark, this indicates that First Majestic has not financed the company's assets through debt. As the number has increased, so is the risk to the company.
5. Debt-to-Equity Ratio = Total Liabilities / Shareholders' Equity
The debt-to-equity ratio is another leverage ratio that compares a company's total liabilities with its total shareholders' equity. This is a measurement of how much suppliers, lenders, creditors and obligators have committed to the company versus what the shareholders have committed.
A high debt-to-equity ratio generally means that a company has been aggressive in financing its growth with debt. This can result in the company reporting volatile earnings. In general, a high debt-to-equity ratio indicates that a company may not be able to generate enough cash to satisfy its debt obligations, and therefore is considered a riskier investment.
- 2010 - $66 million / $256 million = .26
- 2011 - $93 million / $351 million = .26
- 2012 - $220 million / $594 million = .37
Compared with 2010, First Majetic's debt-to-equity ratio has increased. The ratio has increased from .22 to .51. As the ratio is currently well below 1, this indicates that shareholders have more invested than suppliers, lenders, creditors and obligators. .51 indicates a low amount of risk for the company. As the ratio is below 1 and considered low, so is the risk for the company.
6. Capitalization Ratio = LT Debt / LT Debt + Shareholders' Equity
(LT Debt = Long-Term Debt)
The capitalization ratio tells the investors the extent to which the company is using its equity to support operations and growth. This ratio helps in the assessment of risk. Companies with a high capitalization ratio are considered to be risky because they are at a risk of insolvency if they fail to repay their debt on time. Companies with a high capitalization ratio may also find it difficult to get more loans in the future.
- 2010 - $2 million / $258 million = .01
- 2011 - $10 million / $361 million = .03
- 2012 - $14 million / $608 million = .02
Over the past three years, First Majestic's capitalization ratio has increased from .01 to .02. As the capitalization ratio increased, this implies that First Majestic has acquired more long-term debt than shareholders' equity. As this is the case, the company has less equity to support its operations and add growth. As the ratio has only increased slightly, financially this implies a slight increase of risk to the company.
7. Cash Flow to Total Debt Ratio = Operating Cash Flow / Total Debt
This coverage ratio compares a company's operating cash flow with its total debt. This ratio provides an indication of a company's ability to cover total debt with its yearly cash flow from operations. The higher the percentage ratio, the better the company's ability to carry its total debt. The larger the ratio, the better a company can weather rough economic conditions.
- 2010 - $58 million / $3 million = 19.33
- 2011 - $128 million / $15 million = 8.53
- 2012 - $136 million / $29 million = 4.70
Over the past three years, the cash flow to total debt ratio has decreased significantly. The ratio has decreased from 19.33 in 2010 to 4.70 in 2012. As the current cash flow to debt ratio is well above 1, this implies that the company does has the ability to cover its total debt with its yearly cash flow from operations.
Based on the five debt ratios listed above, we can see a slight increase in financial risk when compared to 2010. All of the ratios listed above show a slight degradation in financial strength but as the ratios were so low in 2010, the company still shows no risk of being highly leveraged, or in any financial distress. As the price of sliver looks to be range bound in 2013, the company should be able to make money on its assets and will not be burdened by massive amounts of debt and debt obligations. The next step will reveal how much the company will pay for the debt incurred.
Cost of Debt
The cost of debt is the effective rate that a company pays on its total debt.
As a company acquires debt through various bonds, loans and other forms of debt, the cost of debt is a useful metric. It gives an idea as to the overall rate being paid by the company to use debt financing.
This measure is also useful because it gives investors an idea as to the riskiness of the company compared with others. The higher the cost of debt, the higher the risk.
8. Cost of debt (before tax) = Corporate Bond rate of company's bond rating.
- Long Term Bond Yield = 3.1%
- Current cost of Debt as of April 4th 2013 = 3.1%
9. Current tax rate
- 2010 - $11 million / $47 million = 23.40%
- 2011 - $34 million / $138 million = 24.64%
- 2012 - $22 million / $111 million = 19.82%
2010 - 2012 3-year average = 22.29%
From 2010 - 2012 First Majestic Silver has averaged tax rate of 22.29%.
10. Cost of Debt (After Tax) = (Cost of Debt Before Tax) (1 - Tax Rate)
The effective rate that a company pays on its current debt after tax.
- .031 x (1 - .2229) = Cost of debt after tax
The cost of debt after tax for First Majestic Silver is 2.34%
Cost of Equity or R Equity = Risk Free Rate + Beta Equity (Average Market Return - Risk Free Rate)
The cost of equity is the return a firm theoretically pays to its equity investors (for example, shareholders) to compensate for the risk they undertake by investing in their company.
- Risk Free Rate = U.S. 10-year bond = 1.77% (Bloomberg)
- Average Market Return 1950 - 2012 = 7%
- Beta = (MSN Money) First Majestic's Beta = 2.15
Risk Free Rate + Beta Equity (Average Market Return - Risk Free Rate)
- 1.77 + 2.15 (7- 1.77)
- 1.77 + 2.15 x 5.23
- 1.77 + 11.24 = 13.01%
Currently, First Majestic Silver has a Cost of Equity or R Equity of 13.01%, so investors should expect to get a return of 13.01% per-year average over the long term on their investment to compensate for the risk they undertake by investing in this company.
(Please note that this is the CAPM approach to finding the cost of equity. Inherently, there are some flaws with this approach and that the numbers are very "general." This approach is based off of the S&P average return from 1950 - 2012 at 7%, the U.S. 10-year bond for the risk-free rate, which is susceptible to daily change and Google Finance beta.)
Weighted Average Cost of Capital or WACC
The WACC calculation is a calculation of a company's cost of capital in which each category of capital is equally weighted. All capital sources such as common stock, preferred stock, bonds and all other long-term debt are included in this calculation.
As the WACC of a firm increases, and the beta and rate of return on equity increases, this is an indicator of a decrease in valuation and a higher risk.
By taking the weighted average, we can see how much interest the company has to pay for every dollar it finances.
For this calculation, you will need to know the following listed below:
Tax Rate = 22.29%
Cost of Debt (before tax) or R debt = 3.1%
Cost of Equity or R equity = 13.01%
Debt (Total Liabilities) for 2012 or D = $220 million
Stock Price = $14.27 (April 4th, 2013)
Outstanding Shares = 116.98 million
Equity = Stock price x Outstanding Shares or E = $1.669 billion
Debt + Equity or D+E = $1.889 billion
WACC = R = (1 - Tax Rate) x R debt (D/D+E) + R equity (E/D+E)
(1 - Tax Rate) x R debt (D/D+E) + R equity (E/D+E)
(1 - .2229) x .031 x ($.220/$1.889) + .1301 ($1.669/$1.889)
.7771 x .031 x .1164 + .1301 x .8835
.0028 + .1149
Based on the calculations above, we can conclude that First Majesic Silver pays 11.77% on every dollar that it finances, or 8.36 cents on every dollar. From this calculation, we understand that on every dollar the company spends on an investment, the company must make $.1177 plus the cost of the investment for the investment to be feasible for the company.
Debt Side Summary
All indications above reveal that First Majestic has slightly increased in financial risk when compared to 2010. All of the ratios have displayed an increase in financial risk but all of the ratios listed above are still very low. As the ratios are very low, the company still shows no risk of being highly leveraged, or in any financial distress. The CAPM states that the investor needs 9.15% year-over-year over the long term to get good value on his or her money and for a company as small as First Majestic Silver that is in line with expectations.
2013 Operational Guidance
On Feb. 24th, 2013, First Majestic Silver released fourth quarter and year end results. In this press release First Majestic stated they are expecting an increase from 2012 levels. First Majestic is expecting 12.3 to 13.0 million ounces of silver equivalent production or 11.1 to 11.7 million ounces of pure silver. The report also stated First Majestic's cash cost per ounce would be between $8.56 and $9.15. While they estimate production costs to be between $9.47 to $10.04.
Over the next few years analysts at MSN Money are predicting First Majestic to have an EPS of $1.41 for FY 2013 and an EPS of $1.89 for FY 2014. Analysts at Bloomberg are estimating First Majestic's revenue to be $462 million for FY 2013 and $588 million for FY 2014. Both MSN Money and Bloomberg are expecting significant growth over the next couple of years for First Majestic Silver. Currently, Nasdaq.com has a 1 year target of $21.00 while Finviz has a stock price target price of $26.68 for the company.
Chart sourced by (FINVIZ)
The above analysis reveals that First Majestic Silver Corporation is a solid company on the debt side. It has increased its debt levels over the past 3 years but all of the ratios imply that the company is not "over leveraged" or currently in any financial distress. Currently, analysts have a $21.00 price target on the stock. Based on the chart above, the stock is currently on a downtrend, when the stock price begins to form a bottom and break to the upside, it could prove be an excellent opportunity.