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Summary

  • First Majestic Silver reported earnings of $7.6 million and operating cash flow of $19 million on revenues of $66.9 million.
  • Silver production continues to grow, while production costs are at $18/oz.
  • While I anticipated the production growth, the costs are $2/oz. higher than I anticipated.
  • The stock is still pricing in strong growth and low costs, and while I'm not selling my stake, I would wait for a pullback before adding.

First Majestic Silver (NYSE:AG) just reported its second-quarter earnings results. The company earned $7.6 million, or $0.06/share, and generated $19 million, or $0.16/share, in cash flow on revenues of $66.9 million. The company reported a 7% quarter-over-quarter increase in silver production (3.9 million equivalent ounces), while production costs fell from $18.60/oz. to $18/oz. on a by-product basis.

Since I wrote about First Majestic Silver last July, the company has had some issues. First, the company's production costs have been higher than I expected. While a $2/oz. differential ($18/oz. costs vs. $16/oz. estimates) won't be a lot once the silver bull market resumes, this extra $2/oz. is a big deal, and investors have taken notice. Second, the company operates exclusively in Mexico, and last year, the Mexican government instituted a 7.5% mining royalty that has taken a toll on First Majestic and its peers. Finally, as the price of silver has remained weak, management has decided to delay the expansion of its Del Toro Project. As a result, the stock has been underperforming the sector, which has been incredibly strong.

The figures reported today reflect these issues, although investors should be pleased that the company is still growing production and that it is turning a profit. I should also note that management has been buying back stock. While 40,000 shares isn't a lot, the company paid less than C$10 each, meaning that management is using a disciplined approach to the buyback, making it that much more effective.

Going forward, I think the company will be able to move past these issues and become the high-growth, low-cost producer it once was, but this won't happen overnight. Therefore, investors should follow management's lead and buy the stock on weakness.

Source: Update: First Majestic Silver's Q2 Earnings