Summary
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First Majestic has been underperforming its peers in the silver mining sector.
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First Majestic's cash level has been dropping.
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Mining costs have risen from Q1 to Q3, but is expected to decline in Q4 and next year.
By Ivan Y.
Silver mining stocks have been one of the worst performing sectors in 2014 and First Majestic Silver (NYSE:AG) has been one of the worst performers in this sector year-to-date.
Is there any hope for this beaten down silver stock? I would say 'yes' there is hope and the stock looks tempting below $5, but that doesn't mean that the stock is cheap and that it should be bought.
Declining Cash and Rising Costs
It's hard to find anything positive about First Majestic's performance this year both operationally and financially. Low silver prices have dealt a blow to AG's balance sheet this year. At the beginning of the year, AG had $54.8 million in cash (and cash equivalents). That has dwindled down to $34.7 at the end of Q3. It looks even worst when you compare it to the beginning of 2013 when AG had $110.1 million in cash:
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$110.1 ('13 Q1)
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$78.9 ('13 Q2)
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$67.5 ('13 Q3)
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$54.8 ('13 Q4)
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$41.5 ('14 Q1)
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$66.7 ('14 Q2)
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$34.7 ('14 Q3)
Subsequent to the close of Q3, the company sold nearly 1 million ounces of silver that it had held over from Q3. This has resulted in a cash increase of $16.1 million. So, to be fair, the current cash level should be about $50.8 million, which is still less than half of what it was at the beginning of 2013. Besides low silver prices, high cap-ex spending also explains why the cash level has dropped so much. Consider that so far in 2014, AG has generated $51.8 million in positive operational cash flow, but has spent more than that on cap-ex.
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Q1: $19.3 (op cash flow), $35.0 (cap-ex)
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Q2: $27.5 (op cash flow), $24.2 (cap-ex)
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Q3: $5.0 (op cash flow), $29.0 (cap-ex)
Operationally, the picture is not pretty either. Mining costs have risen throughout the year both in terms of cash costs and all-in sustaining costs.
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Q1: $9.88 (cash cost), $18.71 (all-in)
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Q2: $9.63 (cash cost) , $18.18 (all-in)
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Q3: $10.41 (cash cost), $19.89 (all-in)
$19.89 is well above the current ~$16.50 spot price of silver and is not sustainable for the company unless it is reduced. The company knows this and has taken steps to reduce costs in Q4 and in 2015. These steps include:
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A new power line connection at Del Toro is expected to significantly reduce cost at that project starting in Q4. The company had previously been relying on more expensive portable power generators.
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A new contract made with a chemical supplier will reduce expenses going forward. Delivery under this contract began near the end of Q3.
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The company is also negotiating with other suppliers and contractors to reduce expenses.
In addition, lower oil prices should also reduce costs across the entire mining industry.
Future Outlook
As far as the stock is concerned. I had noted in a previous article that AG was expensive if you compare the price/book ratio with other silver mining stocks. Despite the fact that AG has dropped more than $3 since then, the market continues to give it a premium valuation relative to other silver stocks. The current price/book ratio is almost exactly 1.0, but most silver stocks are trading well below book value.
It's hard to say where this stock is going. It seems like it is holding in a range between $4.75 and $5.5. Buying at or near the bottom of this range may be a nice trade, but if silver goes on to make lower lows, the range is more than likely to be broken to the downside. I keep AG on my watchlist and continue to wait for a great opportunity to initiate a long trade.