The company operates five primary silver mines in Mexico and has been able to remain profitable throughout the ongoing silver price correction. Third quarter results proved no exception as the company posted $0.14 earnings per share at a time when many other silver miners struggle to break even. In this article we would like to present our view on the company's financial standings which will lead to our investment thesis for First Majestic Silver.
First Majestic Silver booked a record quarter in terms of mine output producing 3.37M silver equivalent ounces of metals; a 35% increase year-on-year which is owed to a large degree to the successful start-up of the Del Toro mine earlier this year.
Production costs continued to decrease. The company reported cash costs of $8.84/oz, down from $9.43/oz in the previous quarter and $9.19/oz in Q3/2012. This reduction in cash costs is mainly due to successful cost control at the mines and increased by-product credits.
First Majestic Silver has been pursuing an aggressive internal growth plan this year which is nearing completion.
The Del Torre plant phase II expansion to 2000 tpd is on track to pour first Dore bars later in November. However, further expansion plans as originally planned have been down-scaled in order to conserve cash in the present silver price environment and the plant will now be ramped up to 3000 tpd in 2014 with further expansion anticipated for 2015.
The expansion program at the San Martin mine has been completed successfully and reports for the La Guitarra mine are showing greatly improved cash costs due to a new smelting agreement and increased gold credits.
First Majestic Silver had made the decision to hold some silver in inventory towards the end of the second quarter speculating on better prices following the June bottom. This silver has since been sold, presumably at higher prices.
N.B. The numbers in brackets represents the year-on-year comparison with Q3/2012.
The average realized silver price for the quarter was recorded as $21.58, down from $30.48 a year ago. Despite the severe drop in silver price the company maintained strong cash flow from operations. First Majestic silver recorded Revenues of $192.3M (+9%) for the quarter which translated into Operating Earnings of 47.3M (-39%).
Operating Earnings translated into net earnings of $16.32M (-34%) after paying $5.6M in tax. Starting 2014 a new tax regime will be introduced by the Mexican government that has been the source of much discussion in the industry. The company advises that this new tax regime will have a significant impact. Evaluations are still ongoing but investors may brace themselves for significant increases in tax payments in 2014.
With regards to the results of the cost cutting program introduced earlier in the year Keith Neumeyer, CEO and President of First Majestic, stated:
"[…] costs at the corporate level have also declined 11% compared to the previous quarter. As we can't count on an improved environment in the short term for silver prices, management has little choice other than to cut further. "
Costs are therefore expected to decrease further in coming quarters.
First Majestic Silver has an exceptionally strong balance sheet with a current ratio of 2.16 indicating that the company has ample funds to pay upcoming bills.
There are $28.6M in current debt and lease obligations recorded, in addition to $17.8M of long term lease obligations. The debt-to-equity ratio therefore remains below 0.1. At the end of September the company had $67.5M in cash and a similar amount in working capital.
Since the failed takeover of Orko Silver the company has been quiet in terms of corporate activities and focused on organic growth. With a strong balance sheet as currently reported and with other silver miners increasingly stretched we are wondering if it will be much longer before the company announces another acquisition. In this context we are especially curious if the company will maintain its declared Mexico-only focus in the light of recent tax reforms in the country.
First Majestic Silver continues to show a very convincing performance under difficult circumstances. We expect this company to emerge stronger than others from the ongoing silver price correction.
The only question mark hanging over the company is the Mexican tax reform. The effects of this development are yet to be measured and might deter some investors. The company's focus on this particular country might turn into a disadvantage in comparison with other silver miners that have operations in other countries. To this end we are curious if the company might branch out geographically and make an acquisition in another country.
Despite these uncertainties we continue to view First Majestic Silver as one of the most attractive investments in the silver space.
Disclosure: I am long AG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.