Seeking Alpha
Long/short equity, special situations, precious metals
Profile| Send Message|
( followers)  

On the 9th February 2011, we interviewed Keith Neumeyer, President and CEO of First Majestic Silver Corp. (AG) along with Todd Anthony, Investor Relations Manager Jill Arias, VP of Marketing, with the view to making an investment in this company. We had met with Keith many years earlier at a silver summit in London and followed their progress and kept in touch with the company for some time before we conducted this interview.

This is what we concluded at the time:

In 2010 First Majestic was the third best performing stock on the TSX, S&P Composite Index which reflects their phenomenal growth. We have tracked them for about five years, but for various reasons, we haven’t made a purchase. Either we bid too low, being tight, or were distracted at the time. So now we have to put this one down to ‘the one that got away’ as we failed to pounce when the opportunity presented itself.

Going forward, we would like to say that we should buy the dips, however, if silver prices take off as we expect them to, then there may not be too many dips in front of us. A better strategy might be to layer in over time and build up a position over the coming months. We will commence with the purchase of a few shares tomorrow and take it from there.

We then took the plunge and made the purchase for the an average cost of $13.13 per share. Since then the silver prices have oscillated quite dramatically, rallying to almost $50.00/oz and then experiencing a pullback to the $35.00/oz level. The resulting effect saw the share price of AG hit $26.88 before reversing to the current price of $17.22, reflecting its exposure and sensitivity to the price of silver.

Exposure to silver prices is just what we were looking for when we made this purchase, and so this sort of volatility needs to be taken in one's stride. We are of the opinion that silver prices will finish the year in record territory and therefore, plan to hold onto our core holdings regardless of the near term price movements.

First Majestic Corporation has a market capitalization of $1.59 billion, a P/E ratio of 46.54, an EPS of $0.37, with an average volume of around 2.0 million shares traded per day. Its operations are solely confined to Mexico, so you will note that part of the increase in their cash costs is due to the movement between the US dollar and the Mexican Peso, with the Peso having appreciated by around 3% against the dollar. This is something that applies to all silver producers who operate outside of the USA, and when the dollar resumes its trek south, we can expect those types of currency appreciations to grow wider.

Back to the results; first a comment from the CEO, followed by the highlights of the first quarter performance:

In this past quarter, the Company benefited from the strong surge in silver prices while maintaining its production levels comparable to the previous quarter, even with two major construction projects underway. The expansion of the La Parrilla operation is proceeding well and on track while land clearing and mine development at Del Toro is advancing nicely. We are continuing to focus on our capital projects to expand production in the second half of 2011 and to plan for further growth into 2012 and beyond.

Weakness in the US dollar is translating into a higher Mexican Peso and thus a higher US denominated cash costs. As well, some core inflation in the prices of materials and energy used in the processing of silver is occurring. The production outlook remains unchanged as does the cash cost outlook, but we will revisit our cost estimates after the second quarter to determine if our cash cost outlook can remain constant for 2011. We are attempting to counter cost increases with an aggressive growth strategy to yield higher throughputs and economies of scale, as we continue to focus on building our production levels in the short and long term.

Results of Operations:

Generated Revenues of $55.3 million for the first quarter of 2011, an increase of 211% compared to $17.7 million in the first quarter of 2010 and an increase of 38% or $15.2 million compared to the fourth quarter of 2010, spurred on by a 95% increase in the average realized price of silver, combined with a 13% increase in production. Smelting and refining charges decreased to 4% of gross revenue in 2011 compared to 17% of gross revenue in the first quarter of 2010. Average refining charges for doré in the first quarter were $0.37 per equivalent silver ounce, whereas smelting charges for concentrates were $5.46 per equivalent silver ounce.

Recognized Mine Operating Earnings of $35.6 million for the first quarter of 2011 compared to $7.2 million in the first quarter of 2010, an increase of 397%. The increase was attributed to an increase in production from 1.3 million ounces of silver equivalent (not including pre-commercial production) in 2010 to 1.8 million ounces of silver equivalent in the first quarter of 2011, combined with an increase in average realized silver sales prices from $16.73 in the first quarter of 2010 to $32.60 in the first quarter of 2011.

Earned cash flows from operations of $34.4 million ($0.34 per share) (a non-IFRS measure) for the first quarter of 2011 compared to $6.3 million ($0.07 per share) for the first quarter of 2010, an increase of 407%.

The Company generated net earnings of $23.9 million for the first quarter of 2011 compared to net earnings of $0.4 million in the first quarter of 2010 and net earnings of $13.7 million in the fourth quarter of 2010.

The Company generated basic earnings per common share (”EPS”) after current income tax provision (a non-IFRS measure) of $0.29 for the first quarter of 2011. EPS for the first quarter of 2011 after current and deferred income taxes was $0.24, compared to EPS of $0.00 for the first quarter of 2010 and $0.15 for the fourth quarter of 2010.

Increased production from 1,619,403 silver equivalent ounces in the first quarter of 2010 to 1,825,366 silver equivalent ounces in 2011, an increase of 13%. Production was comparable with the fourth quarter of 2010 with a 1% increase in silver production but a slight decrease of production of equivalents from lead and gold. The Company continues to produce 97% of its production as pure silver, making First Majestic the purest silver producing mining company in the world.

Total Cash Costs per ounce (a non-IFRS measure) increased by 6% from $7.78 in the fourth quarter of 2010 to $8.26 in the first quarter of 2011, due to increased costs of energy, reagents, labour and a 3% appreciation of the Mexican Peso relative to the US dollar.

Cash and cash equivalents increased to $85.6 million compared to $41.2 million as at December 31, 2010 and improved working capital to $84.9 million from $46.1 million as at December 31, 2010. The current cash balance as of May 13, 2011 was approximately $97.1 million, giving the Company a very solid financial base to work from to continue to expand the La Parrilla operation and to build out the new Del Toro operation; both currently under construction.

To read this news release in full please follow this link.

Our investment strategy is not to own hundreds of stocks and hope for a multi-bagger somewhere down the line, but to acquire a small number of quality silver producers for our core holdings that we know and understand well. First Majestic Silver Corporation fits our selection criteria and we will look to accumulate more stock over the next few months.

Disclosure: I am long AG.

Source: First Majestic Corp's Record First Quarter Earnings