Despite the surging prices of precious metals, First Majestic Silver (NYSE:AG) has struggled to impress investors, with challenges continuing to plague the company’s performance even as it looks toward a brighter Q2 2024.
Short Summary:
- First Majestic Silver Corp. continues to face financial and operational struggles in Q1 2024 despite higher metal prices.
- Production declines in both silver and gold have notably impacted earnings.
- The company is trading at a high free cash flow multiple, making it an unattractive option in the silver mining sector.
As we near the end of the Q1 Earnings Season for the Silver Miners Index (SIL), First Majestic Silver Corp. (NYSE:AG) continues to struggle. The company reported quarterly production of approximately 5.2 million silver-equivalent ounces (SEOs), a marked decline compared to previous periods. This figure includes about 1.98 million ounces of silver and 35,900 ounces of gold. Such declines were expected due to production issues at the Jerritt Canyon, La Encantada, and San Dimas mines, compounded by a labor disruption at San Dimas.
While the second quarter looks more promising, the challenges of Q1 have left a significant mark. The company’s free cash flow multiple is high at over 70x FY2024 estimates, making it less attractive compared to its peers. Despite hopes for a recovery, First Majestic’s stock continues to trade at what many consider an unattractively high multiple dooming it to underperformance this quarter.
Q1 production was severely impacted by the shutdown of Jerritt Canyon, resulting in a 22% decline in silver production and a 41% decline in gold output. The shutdown was part of an optimization effort, ceasing operations at the high-cost mine. Consequently, the company’s revenue dropped by 32% year-over-year, despite an increase in metals prices. Operating cash flow was a mere ~$12.4 million against capital expenditures of $28.2 million, resulting in a $15.8 million free cash outflow.
“We saw a weak Q1 due to lower production at our key mines and cost pressures,” said Keith Neumeyer, President & CEO of First Majestic Silver. “However, we are optimistic about the second half of the year as we address significant logistical issues and labor disruptions.”
Breaking down the results, Santa Elena performed well with the production of 2.28 million SEOs at an all-in sustaining cost (AISC) of $14.70/oz, improvements due to higher throughput and better recovery rates. Conversely, La Encantada and San Dimas had disappointing output affected by water scarcity and labor disputes, respectively.
Looking at costs, the company continued to face elevated production expenses. AISC per SEO rose to $21.53/oz, a 3% increase from the previous year. Despite turning off the high-cost Jerritt Canyon, overall costs rose due to weaker outputs and the ongoing strength of the Mexican Peso. San Dimas, in particular, saw its production cost per tonne jump to ~$200.7. The impact of these costs outweighed the company’s gains from higher metal prices.
Despite the optimism for later quarters, First Majestic’s financial health remains concerning. The company holds approximately $102 million in cash but maintains a net debt position due to convertible notes and its revolving credit facility. Its elevated free cash outflow multiples reduce its attractiveness to investors who are looking for lucrative retirement investing options in precious metals.
Valuation-wise, First Majestic’s market cap stands at around $2.34 billion with an enterprise value of $2.50 billion. When compared with its peers, this valuation appears high given the company’s current and projected cash flows. For instance, Torex Gold and K92 Mining, two mid-sized producers, offer much better value, generating significantly higher combined free cash flow at nearly $600 million with relatively similar enterprise values.
“First Majestic has been known for its aggressive approach but continuing high costs and declining production metrics make it a challenging investment,” noted an analyst at Alluvial Gold Research. “The company’s valuation does not justify its current operational outlook, especially in a rising silver price environment.”
In summary, while high-quality precious metal companies continue to trade at attractive multiples, First Majestic remains an expensive option with constrained margins. The stock has potential for upside if the silver price drives market sentiment long term, but the substantial share dilution and ongoing operational challenges make it less appealing for investors.
As noted, First Majestic remains a significant player in the silver mining and minting sector, owning and operating notable assets like San Dimas and Santa Elena. However, until the company can show definitive rebounds in production and operational efficiency, it remains a challenging investment, particularly for those looking to bolster their retirement investments in precious metals.
For those seeking exposure to the precious metals sector, alternatives such as B2Gold (BTG) and Agnico Eagle (AEM) have been highlighted for their stronger growth metrics and stable dividends. These companies not only promise better free cash flow but are also more likely to provide sustainable returns over the long term.
In a recent development, First Majestic announced a change in its ticker symbol on the Toronto Stock Exchange from “FR” to “AG” effective May 27, 2024, aligning its brand more closely across the U.S. and Canadian markets. This move is expected to streamline the company’s market presence but does little to address the underlying operational and financial issues.
“We expect the new ticker symbol to enhance our brand alignment within the North American markets,” stated Keith Neumeyer. “Despite our current operational challenges, we remain committed to driving long-term value for our shareholders.”
In conclusion, while First Majestic remains hopeful for a better H2 with identified improvements at La Encantada and expectations for higher grades and throughput at San Dimas, investors should exercise caution. The company’s high cash flow multiple, substantial share dilution, and ongoing operational inefficiencies make it a less appealing option compared to its peers, especially for those focusing on retirement investments.
For in-depth research on potential profitable investments in the silver mining sector, Alluvial Gold Research offers detailed analyses and proprietary tools to help investors navigate this complex landscape.