The tale of grumbles and groans in the Q3 Earnings Season for the Silver Miners Index is nearly over, and another company to join the chorus of despair was First Majestic Silver (NYSE:AG). Sadly, like Pan American (PAAS), it wasn’t a defining quarter, with First Majestic reporting plummeting revenue, dwindling operating cash flow, and significantly escalating costs. These sorrowful results persisted despite moving its highest cost operation into care and maintenance, and despite reaping the benefits of much stronger metals prices after lapping easy comparisons from Q3 2022. In this update, we’ll delve into the Q3 results, its per share metrics following the temporary suspension of operations at Jerritt Canyon, and whether the stock is nearing a low-risk buy zone.
All figures in United States Dollars unless otherwise noted.
Q3 Production & Sales
First Majestic Silver (“First Majestic”) released its Q3 results earlier this month, reporting quarterly production of ~2.46 million ounces of silver and ~46,700 ounces of gold, translating to a 10% and 30% decline from the year-ago period, respectively. The steep decline in production can be attributed to the suspension of operations at Jerritt Canyon, much lower production at San Dimas, and the weakest quarter in years at La Encantada related to water availability issues. While Santa Elena picked up some slack, it wasn’t nearly enough to offset the massive drop in output at its other mines.
For those unfamiliar, First Majestic announced it would wind down operations and reduce its workforce at Jerritt Canyon in March of this year, with the company citing contractor inefficiencies, high costs, inflationary pressures, and lower than expected head grades.
San Dimas and Santa Elena saw a surge in costs, and Jerritt Canyon left a gaping hole in the company’s production profile. The nose-diving production from Jerritt Canyon is a blow to shareholders, despite a slight improvement in All-in Sustaining Costs (AISC) after the suspension of mining activities earlier this year.
“And I’ve said a number of times, we’re expecting to see production in 2024 to be in the 200,000 ounce range from the current about 110,000 ounce range.”
– First Majestic July 2021 Conference Call, discussing Jerritt Canyon
Despite higher metal prices, revenue took a 17% nosedive year-over-year, while operating cash flow before taxes and working capital changes almost halved. The lack of free cash flow generation resulted in significant share dilution, up ~9% year-over-year on a weighted average basis, with substantial year-to-date free outflows. First Majestic’s performance has led to a noteworthy erosion in production per share, despite a period of rising metals prices.
Costs & Margins
First Majestic’s costs and margins display escalating despair, with operating costs skyrocketing notably due to the weakening US Dollar against the Mexican Peso. The soaring costs have led to dismal margin levels and a bleak outlook for the sustained strength of margins without further help from metals prices.
La Encantada also experienced a spike in costs, resulting in limited improvement in AISC margins despite higher average realized silver-equivalent prices. The company’s share price correction and share dilution have weighed heavily on its performance.
First Majestic’s rich valuation continues to be a cause for concern, trading at one of the richest Price to Net Asset Value (P/NAV) multiples sector-wide. The company’s disappointing performance and missed opportunities in acquisitions have led to a justified correction in its share price.
The missed opportunities in acquisitions have led First Majestic to a gloomy fate, with an enduring sentiment of despondency in the stock. The lack of an attractive valuation and the ongoing troubles in operations make First Majestic an unwise investment, standing as a prominent askew amidst more appealing prospects in the sector. As such, First Majestic remains an “Avoid,” with more attractive investment opportunities presenting themselves elsewhere.