First Majestic Silver Stock: Significant Growth On Deck (NYSE: AG)

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Mining in the Nevada desert.

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We’re nearing the end of the Q4 Earnings Season for the Silver Miners Index (SIL) and one of the last companies to report its results is First Majestic Silver (NYSE: AG). Overall, the company had a solid year from a production and sales standpoint, reporting a 32% growth in annual silver-equivalent ounce [SEO] production and a more than 60% increase in revenue. If ahead to FY2022, this growth is set to continue. However, while First Majestic has one of the highest projected earnings growth rates, much of this looks priced into the stock, with AG trading at more than 33x FY2023 earnings estimates.

First Majestic Silver Operations

First Majestic Silver Operations (Company Presentation)

First Majestic Silver released its Q4 and FY2021 results last week, reporting quarterly production of ~ 3.36 million ounces of silver and ~ 67,400 ounces of gold. This marked the company’s highest gold production on record, helped by increased gold production from Ermitano, a huge quarter from San Dimas, and a significant contribution from the company’s new Jerritt Canyon Mine in Nevada (~ 23,700 ounces). The solid finish helped push annual gold production to ~ 192,000 ounces, a more than 40% increase from pre-COVID-19 levels (FY2019). Let’s take a closer look below:

First Majestic Silver - Quarterly Production

First Majestic Silver – Quarterly Production (Company Filings, Author’s Chart)

As shown above, First Majestic finished the year strong, and 2021 was a year of several records. In addition to record gold production in Q4 and FY2021, silver-equivalent production hit a new record of ~ 8.4 million SEOs (75 to 1 ratio) in Q4 and nearly 27 million SEOs for the year. The major contributor to the increase in production was Jerritt Canyon, which contributed nearly 69,000 ounces last year. However, the strength was broad-based and should continue in FY2022, with San Dimas having a solid year (~ 13.5 million SEOs) and Ermitano now in production (Santa Elena), which contributes to higher production at lower costs.

First Majestic Silver - Annual Production & Forward Guidance

First Majestic Silver – Annual Production & Forward Guidance (Company Filings, Author’s Chart)

If we look at First Majestic’s annual production, we can see that silver production was up 15% year-over-year but missed guidance at ~ 12.8 million ounces vs. a ~ 13.4 million-ounce mid-point guidance. The good news was that gold production more than made up for this, coming in at ~ 188,000 ounces, up 88% year-over-year. As noted previously, this growth was not entirely organic, given that Jerritt Canyon contributed more than 60% of this growth, which cost the company more than 20% share dilution. However, we did not see a full contribution from Jerritt Canyon in 2021 (April 2021 deal close), which is one reason why significant growth is on deck in FY2022.

Based on First Majestic’s current guidance, the company expects to increase gold production by more than 45% year-over-year to ~ 273,000 ounces if it meets its mid-point guidance, while silver production will dip slightly. Combined with the recent strength in gold prices, this is expected to translate to significant revenue growth and meaningful growth in annual EPS. However, it’s important to note that even in FY2022, with guided production of ~ 122,000 ounces at Jerritt Canyon, the Nevada operation will be running at nowhere near its full potential.

As discussed in previous updates, Jerritt Canyon may look like an ugly duckling based on current operations, with all-in sustaining costs coming in at $ 2,077 / oz in Q4 and costs expected to come in above $ 1,500 / oz in FY2022. However, it’s important to point out that the company spent heavily in H2 2022, with a $ 10.4 million TSF lift and roaster upgrades. Still, even in FY2022, the operation will be running well below its full processing capacity of 4,000 tonnes per day, a figure that is 60% above the current rate.

Jerritt Canyon Operation

Jerritt Canyon Operation (Company Presentation)

Assuming the company can utilize this excess processing capacity either through higher mining rates or using third-party ore, we should see costs improve significantly at the asset. The company is also looking at ways to improve metallurgical recoveries, an area where the company has seen success at its Mexican operations in the past (high-pressure grinding mills). There’s no question that the costs at the operation will still be high. Still, I do not see any value in judging Jerritt Canyon based on its Q4 2021 or H2 2021 results, given that capital spend was lumpy, and the mine was operating well below its true potential.

Jerritt Canyon - Exploration Targets

Jerritt Canyon – Exploration Targets (Company Presentation)

Obviously, these improvements may not come to fruition, and this is a risk that investors must be comfortable with by investing in First Majestic. However, with a massive land package (30,000+ hectares), a company that has the capital to spend aggressively on exploration on a previously neglected asset, and reduced haulage costs (SSX / Smith Connection), investors should be more open-minded about this asset, and the potential for 190,000+ ounces per annum by 2024. To summarize, though Jerritt Canyon is dragging up First Majestic’s costs for now and looking like a questionable acquisition to some, I am confident in the team turning around the asset and enjoying more respectable margins.

Financial Results

Moving on to the financial results, First Majestic enjoyed one of the highest (if not the highest) revenue growth rates sector-wide in Q4, with revenue up 61% to a new record of $ 204.9 million. This was helped by the drawdown of withheld inventory (~ 1.4 million ounces), higher silver prices, and increased ounces sold from Jerritt Canyon (no contribution last year). Despite the obvious benefits to production from incremental Nevada ounces and selling off withheld inventory, this was still a very impressive quarter and helped push annual revenue to a new record of ~ $ 584 million.

First Majestic Silver - Quarterly Revenue

First Majestic Silver – Quarterly Revenue (Company Filings, Author’s Chart)

Unfortunately, while revenue was up sharply, margins and earnings per share declined sharply. The former was related to higher costs at Jerritt Canyon and the latter was partially related to a much higher share count (share dilution from Jerritt Canyon Mine acquisition). However, it is worth noting that ex-Jerritt Canyon costs came in at very reasonable levels, with AISC of $ 11.29 / oz at San Dimas and $ 14.02 / oz at Santa Elena. The lower costs at Santa Elena were driven by increased production now that Ermitano is online, and the operation benefited from no silver stream applicable to Sandstorm Gold (SAND).

First Majestic Silver - Production & All-in Sustaining Costs

First Majestic Silver – Production & All-in Sustaining Costs (Company Filings, Author’s Chart)

Based on FY2022 guidance, First Majestic should see a slight improvement in costs on a year-over-year basis, with the AISC guidance mid-point sitting at $ 17.42 / oz. This would be a 7% decline year-over-year from $ 18.84 / oz in FY2021, making First Majestic one of the few producers seeing declining costs year-over-year. Obviously, First Majestic’s costs are still well above the sector average with AISC margins of ~ 30%, making the company more sensitive to metals prices than its peers. However, as discussed above, if the company can deliver at Jerritt Canyon and reach its goal of 200,000 ounces per annum, we should see this anchor that’s weighing down margins be less of an impact by 2024/2025.

First Majestic Silver - Annual Earnings Per Share & Forward Estimates

First Majestic Silver – Annual Earnings Per Share & Forward Estimates (FactSet.com, Author’s Chart)

Finally, looking at annual EPS, the headline number was certainly not pretty, with annual EPS declining massively from $ 0.18 to $ 0.02, while free cash flow came in at negative $ 16.9 million (FY2020: $ 30.7 million). The good news is that we should see an improved free cash flow profile this year, assuming metals prices can remain at current levels, and annual EPS should completely recover based on current estimates of $ 0.25. If we look ahead to FY2023 and assume a further improvement in metals prices, annual EPS could more than double vs. FY2020 levels, driven by higher margins and significantly higher production.

Negative Real Rates

Negative Real Rates (YCharts.com, Author’s Chart)

The key will be if metals prices can continue their climb, but as it stands, First Majestic has one of the best earnings growth rates sector-wide and is on track for an earnings breakout this year (new multi-year high in annual EPS) . Given the position of real rates (deep in negative territory) and that precious metals are due for some outperformance vs. the major market averages, these earnings estimates look achievable, assuming the company can grow production closer to 40 million SEOs in FY2023. Let’s take a look at the valuation:

Valuation

Unfortunately, while First Majestic ranks very high on growth, it ranks poorly on value. This is because First Majestic has a market cap of ~ $ 3.81 billion at a share price of $ 14.30 (~ 266 million fully diluted shares). This figure dwarfs my estimate of the company’s combined Project After-Tax NPV (5%) of ~ $ 1.0 billion. It’s worth noting that this does not include any potential impacts from the tax dispute with the Servicio de Administracion Tributaria [SAT], the revenue service of the Mexican Government. Hence, even without factoring in any potential negative impacts from this dispute, the stock trades at over 3x P / NAV. For those unfamiliar, the SAT has issued reassessments of ~ $ 260 million.

If we compare this valuation with more diversified precious metals producers like Agnico Eagle (AEM) and Newmont (NEM), First Majestic trades at a massive premium to the industry group. This is even though Agnico Eagle (~ 1.1x P / NAV) and Newmont (~ 1.3x P / NAV) have more attractive jurisdictional profiles (60% or more of production from Tier-1 jurisdictions) and more attractive margin profiles. So, from solely a valuation standpoint, it’s difficult to justify paying up for First Majestic at current prices.

From a price-to-earnings standpoint, the valuation does not stack up well either, with First Majestic trading at approximately 31x FY2023 earnings estimates ($ 0.42) vs. peers like Newmont at ~ 22x earnings and Agnico Eagle at ~ 20x earnings. So, no matter how you slice it, First Majestic looks like a case of growth at an unreasonable price. Some investors will argue that First Majestic commands a premium given that silver typically outperforms gold in bull markets. While this is a fair point, I do not see any way to justify paying a 50% premium to net asset value for any miner, let alone more than 3.0x P / NAV for First Majestic.

AG Daily Chart

AG Daily Chart (TC2000.com)

Moving on to the technical picture, we can see that First Majestic has rallied sharply after finding support in the $ 9.30 range, but it’s now found itself in the upper portion of its expected trading range. This is based on strong resistance at $ 17.70 and updated support at $ 9.65. Based on $ 3.40 in potential upside to resistance and $ 4.65 in potential downside to support, First Majestic has an unfavorable reward / risk ratio of 0.73 to 1.0 at current levels, below my preferred reward / risk ratio of 4.0 / 1.0. The unfavorable reward / risk ratio does not mean that the stock can not head higher, but this is not what I would consider a low-risk buy point.

First Majestic Silver Operations

First Majestic Silver Operations (Company Presentation)

First Majestic Silver had a solid year and based on FY2022 guidance and current earnings estimates, the company should see significant output growth and enjoy significant growth in annual EPS. However, with the stock trading at ~ 31x next year’s earnings estimates and more than 3.0x P / NAV, I do not see anywhere near enough margin of safety to justify paying up for the stock at $ 14.30. In fact, if we were to see the stock head above US $ 15.90 before May, I would view this as an opportunity to book some profits.



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