Is This Primary Silver Miner a Worthwhile Investment After Losing 17%?

Since the start of 2018 the price of silver has collapsed, plummeting by 14% to be trading at under US$15 an ounce. This has dragged down many primary silver miners to see the Global X Silver Miners ETF lose a whopping 23% over the same period. One of the hardest hit is First Majestic Silver Corp. (TSX:FR)(NYSE: AG), which saw its market value dive by 17% or slightly greater than silver has dropped. According to some pundits, that has created an opportunity for bargain-hunting value investors, but there are signs that any recovery in silver and First Majestic’s market price may be some way off. 

Now what?

First Majestic is rated as the world’s second largest primary silver miner, owning and operating a diversified portfolio of six producing mines located in Mexico as well as four development and exploration projects. The completion of the US$320 million acquisition of Primero Mining Corp. bolstered First Majestic’s portfolio of silver mining assets, reserves and production.

These assets give First Majestic reserves of 196 million silver equivalent ounces and 2018 production is forecast to be 20.5 million to 22.6 million ounces, which at the top end of that range is an impressive 40% greater than 2017. 

Even with silver trading at below US$15 an ounce, that significantly higher production will give First Majestic’s earnings a solid lift, with it estimated that it will add up to an additional US$96 million in revenue.

Nonetheless, the key problem facing First Majestic is that the outlook for silver remains poor and some analysts expect it to remain stagnant for some time. Even after gold rebounded recently to trade above the psychologically important US$1,200 per ounce mark, silver continues to languish at US$14.82, which is close to the cost of production for some higher cost silver producers.

In fact, First Majestic reported all-in sustaining costs (AISCs) of US$16.43 per ounce for the second quarter 2018, which was a 16% spike over the equivalent quarter in 2017. The miner has forecast full-year AISCs of US$14.53 to US$15.83 per ounce, which at the top end are greater than the current market price for silver.

Those high AISCs are of concern and along with silver’s recent weakness are the reason for its share price plunging sharply in recent months.

It is worth noting, however, that AISCs include mining, processing, sales, general and administrative, exploration and reclamation costs as well as other direct overheads and sustaining capital. That means First Majestic can to an extent dial them up or down depending on the outlook for silver.

Another key indicator as to the profitability of the miner’s operations are cash costs, which are the direct expenses associated with production. For the second quarter, First Majestic reported cash costs of US$7.59 per ounce, which is a little over half of silver’s spot price. This means even with silver trading at less than US$15 per ounce and the poor outlook for the precious metal, First Majestic’s operations will remain cash flow positive.

First Majestic’s recently acquired San Dimas mine, which is its single largest producer of silver, is also a low-cost operation reporting second quarter ASICs of US$5.41 per ounce produced. That means that even with silver trading near three-year lows, the mine remains highly profitable. 

So what?

First Majestic is a highly leveraged play on silver, which explains why its stock has been hit so hard in the current challenging operating environment. While the outlook for silver remains poor, even the slightest recovery will give the miner’s market value a healthy lift. When that is considered in conjunction with the purchase of the quality low-cost San Dimas mine and its solid balance sheet, the latest dip in its market value does provide an opportunity for risk tolerant contrarian investors.