TD OpinionFull report on TD website.
Event We have updated our estimates to reflect First Majestic's Q3/20 results. Impact: NEUTRAL Q3/20 adjusted EPS of $0.12 was below our estimate of $0.17 and consensus of $0.13. The miss versus our estimate was largely attributed to higher operating costs and a lower realized silver price in the quarter. Revenues were a quarterly record, aided by higher prices and a $25mm draw-down of precious metal inventories that was withheld during the previous quarter in anticipation of higher prices.
Strong free cash flow and record cash position — We calculate that the company generated ~$21mm in FCF in the third quarter, after spending $30mm in total capex. The company ended Q3/20 with a record cash position of $232mm and debt of $140mm.
Guidance reaffirmed — As a reminder, Q3/20 production results were prereleased in early-October, and it was a strong quarter with solid performances from both Santa Elena and San Dimas. The company reiterated its 2020 production guidance of 11.0-11.7Moz Ag at cash costs of $3.95-$4.59/oz-Ag and AISC of $12.29-$13.45/oz-Ag. We are forecasting 2020 production of 11.4Moz Ag at cash costs of $4.06/oz-Ag (AISC: $12.01/oz-Ag).
Growth and optimization initiatives — The company continues to expect the installation of the HIG mill at San Dimas to be complete in H2/21. This is expected to result in improved recoveries and lower energy consumption. In addition, the ramp-up of the higher-grade Tayoltita mine continues at San Dimas and is expected to contribute 10% of the ore feed by year-end. At Santa Elena, the company expects the initial production from the high-grade Ermitao ore body to begin by mid-2021, displacing lower-grade heap-leach material.
TD Investment Conclusion We are maintaining our C$19.50 target price and BUY rating on the company. Despite the miss on earnings, Q3/20 was a strong quarter for First Majestic, with the operations delivering on production and the company generating meaningful FCF. We expect the positive FCF to continue through Q4 and into 2021 at our precious metals prices, which should help support the company's growth initiatives.