We made our first purchase of First Majestic Silver Corporation (NYSE:AG) for $13.13 on 9th Feb 2011 and decided to hold, despite the rapid rise that followed when this stock gained 92% within two months of our purchase. As we can see from the chart below, the stock price has consolidated along with the correction in silver prices.
Still, at $20.72 we are sitting on a paper profit of 58.30% at the moment and are comfortable with this acquisition.
Taking a quick look at the chart we can see that this period of consolidation has allowed the 200dma to move up in support of the stock price, thus setting the stage for the next leg up. The steam has been taken out of the technical indicators which have moved out of the overbought zone, providing the space for a move to higher ground. Our expectation is for this silver producer to actively participate in the fall rally and that it will finish the year well above its current stock price.
We are witnessing before our eyes the dramatic re-rating of silver as the world awakens to its importance as a fundamental metal for the continued development of the human race. Management’s long standing belief of the importance of silver has focused First Majestic into an aggressive expansion plan, originally launched in 2004, which continues today. We are maintaining our production target of eight million equivalent ounces of silver for fiscal 2011; however, shareholders should expect higher cash costs due to the weakness in the US dollar, higher cyanide, petroleum and electrical prices, and extra security costs. We remain very focused on reducing, as much as possible, the approaching cost increases inherent in the current mining environment, but we also realize that a greater focus on our aggressive growth strategy will mitigate these cost increases to yield economies of scale which is of greater importance in the longer term.
We draw your attention to the words “dramatic re-rating of silver”, something that we believe is long overdue. The highlights of these results are listed below:
- Cash Flow per share (non-GAAP) of $0.37 representing a 199% increase from Q2 2010
- Earnings per share (basic) amounted to $0.30 representing a 150% from Q2 2010
- Gross Revenue of $68 million showing a 148% increase from Q2 2010
- Net Earnings after Taxes amounted to $30.6 million, a 179% increase from Q2 2010
- Mine Operating Earnings of $46.8 million showing an increase of 270% from Q2 2010
- Total Cash Cost were US$8.32 per ounce, up 7% compared to Q2 2010
- Silver ounces produced increases by 16% to 1,780,379 compared to 1,538,798 ounces in Q2 2010
- 2011 production guidance remains unchanged at 8.0 million ounces of silver equivalent
- Fully un-hedged to silver prices as treasury exceeds $105 million
Generated Revenues of $68.0 million for the second quarter of 2011, an increase of $12.8 million or 23% compared to $55.3 million in the first quarter of 2011 and an increase of 148% or $40.6 million compared to the second quarter of 2010. Smelting and refining charges and metal deductions decreased to 2% of gross revenue in the second quarter of 2011 compared to 6% of gross revenue in the second quarter of 2010 and 3% in first quarter of 2011. Average smelting charges for doré in the second quarter of 2011 were $0.39 per silver ounce produced whereas for concentrates they were $5.43 per silver ounce produced.
Recognized Mine Operating Earnings of $46.8 million for the second quarter of 2011 compared to $12.6 million in the second quarter of 2010, an increase of $34.1 million or 270%, and an increase of $11.2 million or 31% compared to the first quarter of 2011. The increase was attributed to a 13% increase in sales volume from the second quarter of 2010, and a 4% increase in sales volume since the first quarter of 2011. There was also an increase in realized silver prices in the second quarter of 2011, from $18.38 in the second quarter of 2010 to $39.08 in the second quarter of 2011. In comparison, the Comex average in the second quarter of 2011 was $38.42 per ounce of silver.
Earned cash flows from operations of $37.9 million ($0.37 per share) (a non-IFRS measure) for the second quarter of 2011 compared to $11.4 million ($0.12 per share) for the second quarter of 2010, an increase of 234%.
The Company generated net earnings of $30.6 million for the second quarter of 2011 compared to net earnings of $11.0 million in the second quarter of 2010 and net earnings of $23.9 million in the first quarter of 2011.
EPS for the second quarter of 2011 was $0.30, compared to EPS of $0.12 for the second quarter of 2010 and $0.24 for the first quarter of 2011.
Increased production from 1,656,165 silver equivalent ounces in the second quarter of 2010 to 1,843,830 silver equivalent ounces in the second quarter of 2011, an increase of 11%. Production was consistent with the first quarter of 2011 with a 1% increase in silver production.
Total Cash Costs per ounce (a non-IFRS measure) increased by 1% from $8.26 in the first quarter of 2011 to $8.32 in the second quarter of 2011, due to increased costs of cyanide, electricity and diesel, and a 3% appreciation of the Mexican Peso relative to the US dollar. Cash and cash equivalents increased to $105.0 million compared to $41.2 million as at December 31, 2010 and improved working capital to $100.9 million from $46.1 million as at December 31, 2010. As of today, the current cash balance is $110 million.
First Majestic has experienced a new record for quarterly earnings for the second quarter of 2011 due to a 113% increase in average realized silver prices over the second quarter of 2010, and a 13% increase in ounces of silver sold from the second quarter of 2010. Silver equivalent production remained steady with a 1% increase over the first quarter to a total of 1,843,830ounces in the second quarter of 2011, which is up 11% over the same quarter of 2010.
In addition to the Company’s record production and profitability, management has been focused on the current expansion taking place at the La Parrilla operation. This expansion which started in December 2010 is progressing well and the expanded flotation circuit is anticipated to start production in September while the expanded cyanidation circuit is expected to begin production in November.
At the Del Toro Silver Mine, steady progress is being made with the Company’s newest construction project. In addition, the drilling and development program which commenced in April has begun to define a large oxide resource not previously anticipated and which will be outlined in detail in an upcoming NI 43-101 compliant economic evaluation. In the interim, the re-engineering of this construction project is underway to incorporate a cyanidation circuit of 1,000 tpd running in parallel to the already permitted 1,000 tpd flotation circuit. Foundations for this new mill are scheduled to commence to be laid in September 2011. To read the results in full please click this link.
First Majestic is a producing silver company focused on silver production in México and is aggressively pursuing its business plan of becoming a senior silver producer through the development of its existing mineral property assets and the pursuit through acquisition of additional mineral assets which contribute to the Company achieving its aggressive corporate growth objectives.
Finally, we were in touch with Todd Anthony, MBA, Investor Relations Manager, who summarized their position as follows:
We are extremely happy to announce record earnings of $0.30 cents per share this quarter and have reaffirmed our production guidance of 8M silver equivalent ounces in 2011. During the quarter, the overall mining sector witnessed higher cost pressures attributed to the weakness in the US dollar, higher cyanide, petroleum and energy costs. Investors should realize this current inflationary environment will continue to act as a constant headwind. However, while many of our peers have reported double-digit Q/Q cost increases, First Majestic reported a 1% increase in cash costs due to operational efficiencies at our mines and we will continue to strive at achieving economies of scale in order to maximize profits for our shareholders.”
We are of the opinion that we are in an inflationary environment and so it is very important that you keep an eye on the cash costs of any producer when doing your due diligence prior to making an acquisition.
First Majestic Corporation has a market capitalization of $1.92 billion, a P/E ratio of 32.89, an EPS of $0.63, with an average volume of around 1.7 million shares traded per day and trades in Toronto under the symbol of FR, and on the NYSE under the symbol of AG.
As always, go gently with the implementation of your acquisitions strategy in this sector as it will continue to be very volatile and gut wrenching single session moves in either direction should be expected. However, the trend is up so stick with it.
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Disclosure: I am long AG.