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

First Majestic Corporation (NYSE:AG) has announced its financial results for the third quarter which we will review below. For disclosure purposes we do own this stock and our opinion may be a tad bias. We kick off with a quick look at the highlights listed as follows:

All financial information is prepared in accordance with IFRS and all dollar amounts are expressed in U.S. dollars unless otherwise indicated. All Cash Costs information is now being presented on a payable ounces basis consistent with the recommendations of the Silver Institute. All prior period information has been restated or reclassified for comparative purposes unless otherwise noted.

2011 THIRD QUARTER HIGHLIGHTS

  • Cash Flow per share (non-IFRS) of $0.38 representing a 122% increase from Q3 2010.
  • Earnings per share (basic) amounted to $0.27 representing a 146% increase from Q3 2010.

  • Adjusted earnings per share (non-IFRS) amounted to $0.30.

  • Gross Revenue of $61.4 million showing an88% increase from Q3 2010.

  • Net Earnings after Taxes amounted to $27.8 million, a 176% increase from Q3 2010.

  • Mine Operating Earnings of $42.5 million showing an increase of 168% from Q3 2010.

  • Total Cash Cost was US$8.39 per ounce, up 19% compared to Q3 2010.

  • Silver ounces produced decreased by 6% to 1,708,865 compared to 1,823,370 ounces in Q3 2010.

  • Fully un-hedged to silver prices as treasury exceeds $106 million.

The team at silver-prices 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.

The first thing to note here is that “Total Cash Cost was US$8.39 per ounce, up 19% compared to Q3 2010,” when we read further, AG also states:

“Total Cash Cost per ounce (a non-IFRS measure) increased by 1% from $8.32 in the second quarter of 2011 to $8.39, however, the company's total production costs per tonne decreased 11% to $26.86 per tonne. The increased Cash Cost per ounce is primarily related to an increase in consumables at the La EncantadaSilver Mine.”

At this point we thought it prudent as ascertain whether or not this increase in costs would be a recurring theme or not, so we contacted Todd Anthony, Investor Relations Manager, for an explanation, which he very kindly answered as follows:

“The extra costs at La Encantada were a direct result of lower grades and lower recoveries due to a larger amount of tailings in the blend to try to make up for some production loss from La Parrilla (which was ramping up in September). The LE mill averaged 4250 tpd in the Q but sometimes ran as high at 5000 tpd. It costs roughly $2 per tonne to process the extra tailings so the extra throughput brought the cost per tonne down.

Also, in the third quarter La Encantada consumed cyanide that was purchase in the 2Q during the Dupont flood which cause the price of cyanide to double. These costs were included in the cash costs for 3Q and we don't foresee these extra costs going forward.”

On this occasion it looks to us that this cost increase is a one off event. If you are a retail investor, do try and keep tabs on any aberration in the cash costs of the precious metals producers in your portfolio. If they are on the increase, find out why as part of your due diligence, make a direct inquiry, after all you are a stock holder and you are entitled to an explanation.

2011 THIRD QUARTER HIGHLIGHTS TABLE

HIGHLIGHTS

Third Quarter 2011

Third Quarter 2010

Change

Year-on-Year

Second Quarter 2011

Change from

Second Quarter

2011

Revenues

$61.4 million

$32.6 million

Up 88%

$68.0 million

Down 10%

Mine Operating Earnings

$42.5 million

$15.9 million

Up 168%

$46.8 million

Down 9%

Net Earnings after Taxes

$27.8 million

$10.1 million

Up 176%

$30.6 million

Down 9%

Cash Flow Per Share before changes in non-cash

working capital

$0.38 per share

$0.17 per share

Up 122%

$0.36 per share

Up 7%

Earnings Per Share - basic

$0.27 per share

$0.11 per share

Up 146%

$0.30 per share

Down 10%

Silver Ounces Produced

(excluding equivalent ounces of gold, zinc and lead)

1,708,865 oz. Ag

1,823,370 oz. Ag

Down 6%

1,780,379 oz. Ag

Down 4%

Payable Silver Ounces Produced

1,655,297 oz. Ag

1,802,172 oz. Ag

Down 8%

1,761,697 oz. Ag

Down 6%

Silver Equivalent Ounces Produced

1,791,770 eq. oz.

1,920,498 eq. oz.

Down 7%

1,843,830 eq. oz.

Down 3%

Total Cash Costs per Ounce

$8.39

$7.03

Up 19%

$8.32

Up 1%

Average Revenue per Payable Equivalent Ounces Sold

$38.83

$19.77

Up 96%

$39.08

Down 1%

Cash and Cash Equivalents (as at September 30)

$106.2 million

$24.8 million

Up 328%

$105.0 million

Up 1%

CORPORATE UPDATE

The newly expanded 1,000 tpd flotation circuit at the La Parrilla Silver Mine commenced operations on September 2, 2011 and was deemed commercial less than 30 days later on October 1, 2011. The expansion of the cyanidation circuit is continuing well with progress now reaching approximately 90% completion. Construction is expected to complete with start-up commencing later in November 2011. The new leaching tanks are now completed and the new counter current thickeners are almost complete pending the installation of the mechanisms. Once fully operational, the older 425 tpd cyanidation circuit will be replaced with this new state-of-art 1,000 tpd circuit expected by the first quarter of 2012. Also, the new 115,000 Kw power line is expected to be completed also in November which is required to run the entire plant.

The La Parrilla expansion once completed, will result in the total mill capacity reaching 2,000 tpd, effectively doubling the previous output of the La Parrilla operation from approximately 1.8 million ounces of silver equivalent produced in 2010 to more than 3.2 million equivalent ounces in 2012, consisting of 2.9 million ounces of silver, 6.0 million pounds of lead and 4.3 million pounds of zinc.

The total capital budget for the expansion, including expanded underground development is expected to be $40.5 million when completed. Incremental production, revenues and operating costs associated with the new flotation circuit were capitalized in the quarter ended September 30, 2011. Effective October 1, 2011, all revenues and costs from the flotation circuit will be treated as normal course operations and recorded in the income statement rather than being capitalized as pre-production. A total of 40,592 equivalent ounces of silver were excluded from commercial production during the quarter.

In September 2011, the company issued a new NI 43-101 Technical Report for the La Parrilla Silver Mine which indicated that the company's exploration and development efforts have resulted in upgrading a significant portion of the Measured and Indicated Resources to Proven and Probable Reserves. This positive development resulted in the "Life of Mine" ("LOM") at the La Parrilla being extended from two years to fourteen years.

At the La Encantada Silver Mine, efforts are continuing to focus on increasing recoveries. Three areas of focus include: 1) changing the blend of fresh ore versus old tailings; 2) increasing development to access areas absent of manganese; and 3) metallurgical tests to dissolve the manganese prior to cyanidation. The plan to change the mixture of fresh ore to tailings from the current 1:3(25% fresh ore and 75% tailings) to 5:9(36% fresh ore and 64% tailings) by the end of 2011 is going well. This change requires additional milling capacity which will be supplied by the installation of a third ball mill which arrived during the third quarter and is expected to be commissioned at the end the fourth quarter. Under planned conditions with the revised mix of fresh ore and tailings, this plant should be able to achieve 60% recovery rates, based on 78% recoveries for fresh ore and 50% recoveries for tailings.

In addition to changing the blend, the presence of manganese in areas of the La Encantada mine is well known. In recent quarters, an area within the mine with higher manganese levels has been exploited resulting in lower than budgeted recoveries. As a short term solution, in order to compensate for these lower recoveries, mill throughput was increased to an average of 4,259 tpd in the third quarter. The effect was slightly higher costs due to additional chemical and diesel consumption. As a longer term solution, underground development has been increased to access areas for better blending in the future with ores absent of manganese. A total of 3,200 metres of underground development at La Encantada was completed in the third quarter of 2011 compared to 2,784 metres of development completed in the second quarter of 2011, representing an increase of 15%.

In addition to these initiatives, the company is also testing a new sulphuric acid leach process to dissolve the manganese from the ore prior to the cyanidation processing. During the quarter, extensive metallurgical tests were undertaken by two independent labs in the United States and the company's own lab at the La Encantada operation. The company retained Hazen Research, Inc. to construct a laboratory pilot plant in order to test and re-confirm internal lab tests. The results of the metallurgic tests show the possibility of improving metallurgical recoveries substantially and are currently being evaluated further to define the economic parameters of adding this additional process. The company began the construction of a 500 tpd pilot plant at La Encantada during the third quarter to test the SO2 circuit. It is expected that construction will be completed prior to the end of November. The focus of the engineering staff working at the pilot plant is to define the optimum SO2 consumption parameters for an economic design base for a new 4,000 tpdSO2 circuit.

At the San Martin Silver Mine, installation of a new ball mill, replacing an older and smaller mill was completed in the quarter. Total mill capacity has increased from 900 tpd to 950 tpd allowing for increased silver production and lower costs. In addition, two new induction furnaces and two new filter presses were installed and commissioned in the quarter. These mill improvements which were all completed in the third quarter are expected to have a positive impact on overall production, quality of doré and total costs.

Ground breaking at the Del Toro Silver Mine, which commenced in April for the construction of the company's fourth silver mine in Mexico, is progressing well. Two out of the five large pads have been cleared and leveled in preparation for foundation construction. Approximately 80% of the mill equipment has been ordered and is expected to begin arriving on-site during the first quarter of 2012. Re-permitting for a 2,000 tpd operation is currently underway in conjunction with a Preliminary Economic Evaluation which is expected to be released prior to year end. Currently, the permit granted covers only a 1,000 tpd flotation mill, however, due to recent drilling results, a decision was made to build a cyanidation circuit. The mill re-design process is nearing completion resulting in a much larger dual process facility.

A bulk metallurgical test of 5,000 tonnes of ore was conducted at the La Parrilla mill in October to reconfirm metallurgical parameters. Construction of a new three kilometre road was completed during the third quarter allowing for heavy equipment and vehicles to access the mine site bypassing the town of Chalchihuites. A contractor has been assigned to build the water treatment plant and work is expected to be completed by mid-2012. Also, a new power line from the town of Vicente Guerrero and Chalchihuites required for the mine is in the permitting process.

The company purchased a neighbouring claim called Dolores during the quarter consisting of 12 hectares. The previous owner was shipping high-grade ore to the La Parrilla mill for processing. The total purchase price was US$1.5million. Underground development is currently underway to explore the extension of the known ore body. The Dolores mine will be incorporated into the Del Toro operations.

Initial capital costs, pending changes upon completion of the NI 43-101 Technical Report / Preliminary Economic Evaluation for the Del Toro Silver Mine, which will include final metallurgical testing and final plant designs is estimated at $43.9 million for 2011 with additional capital required in 2012.

Now, for a break from wading through the highlights, you may be interested in this short video of Keith Neumeyer, President & CEO, being interviewed on CNBC. The interview covers such topics as the multi-metal company vs pure silver as a business model, safety related to the drug trade in Mexico, security, etc. Please click here.

OUTLOOK FOR 2011

Management wishes to update the company's production guidance for the year ending December 31, 2011. Due to the major expansion at the La Parrilla operation that's been underway for the past three quarters and the areas within the La Encantada mine currently being exploited with higher manganese content, production levels have been slightly lower than originally anticipated. Even though the La Parrilla construction is coming to an end and production levels are expected to improve and action is being taken at the La Encantada to improve recoveries, management feels it's prudent to revise its previous production guidance for the 2011 fiscal year to 7.6 million ounces of silver equivalents which is anticipated to include 7.3 million ounces of silver and 0.3 million ounces of silver equivalents in the form of lead, zinc, gold and iron. Guidance for 2012 will be released in January 2012.

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.

First Majestic Corporation has a market capitalization of $1.40 billion, a P/E ratio of 16.65, a 52 week trading range of $10.32 to $26.88, an EPS of $0.91, with an average volume of around 1.01 million shares traded per day and trades in Toronto under the symbol of FR and on the NYSE under the symbol of AG.

In conclusion we will continue to hold this stock and should the current volatility in the investment space present us with a 'bargain' of an opportunity then we will look to increase our exposure to First Majestic Corporation.

Disclosure: I am long AG.