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Should You Sell First Majestic Silver?

- By Alberto Abaterusso

After a very positive month for silver, in which the price reached a cumulative average of $15.8063 per ounce, or 1.7% above the cumulative average for 2018, silver is downtrending again. The precious metal was down 2.3% at $15.4450 per troy ounce at close on Tuesday.

Investors in silver mining companies may, therefore, want to consider decreasing their exposure to those stocks that are not strongly positioned. One of the stocks that will be impacted is First Majestic Silver Corp. (AG).


The 11% to 24% projected increase in production of equivalent silver to between 24.7 million and 27.5 million ounces for 2019 may not be enough for the miner to swing to a profit and grow both cash flow and cash on hand.

The precious metal has cumulated an average price of $15.6193 an ounce on the London Bullion Market year to date, reflecting just 0.55% upside from 2018.

As a result of low silver prices in 2018, First Majestic Silver recorded a mine operating loss of $11.9 million, a loss of $204.2 million, a 24% decrease in operating cash flow to $61.6 million and a decline in cash and cash equivalents to $57 million.

The company is producing the metal from approximately 196.19 million ounces of equivalent silver in proven and probable reserves, grading 277 grams per ton of ore. These reserves are nestled in mineral properties the Vancouver-based miner currently owns and operates in Mexico, which include the San Dimas and Santa Elena silver and gold mines and the La Encantada, La Parrilla, San Martin and Del Toro silver mines.

With depressed silver prices, the margin per ounce is unlikely to improve since the all-in sustaining costs are expected to be higher this year as a result of First Majestic Silver increasing the budget for development and exploration to $76.3 million. The budget was $73.5 million in 2018. The earnings before interest, taxes, depreciation and amortization margin will be affected in the first quarter as well.

Additional investments in development and exploration in 2018 caused all-in sustaining costs to increase by $1.13 per ounce to $14.95 per payable silver ounce even though the item was in line with the miner's guidance for the year.

The EBITDA margin was also affected by low average realized silver prices as the margin was only 16.6% of total revenue of $301 million, versus an industry median of 25%.

First Majestic must work hard if it wants to improve margins. The company cannot, of course, influence the price of the commodity, but it should try to reduce costs associated with selling the metal.

President and CEO Keith Neumeyer said the company developed several projects last year to create shareholder value in 2019.

As of Tuesday, this stock is trading at a 214% premium to my estimate of intrinsic value, which I calculated to be $2.2 per ordinary share. My calculation considers First Majestic's guidance on equivalent silver production for full 2019, a volume of 196,626,046 shares outstanding and a cumulative average silver price of $15.6193 per troy ounce.

Further, the plan to invest $137.4 million in capital expenditures this year goes against liquidity of $57 million in cash on hand and against operations, which can currently generate $27.4 million in net operating cash flow.

First Majestic Silver also has $149.5 million in long-term debt, of which 0.9% is the current portion.

The stock is not cheap, as the GuruFocus chart below illustrates. This is another reason to start taking some profit off the table. The closing share price of $6.9 on Tuesday was, following a 15% increase for the 52 weeks through March 12, substantially above the 200, 100 and 50-day simple moving average lines. The price is also 5.5% off the midpoint of the 52-week range of $4.59 to $8.48.

In addition, the price-book ratio of 2.23 is 38% above the industry median of 1.62 and the enterprise value-EBITDA ratio is 27.18 versus an industry median of 8.71. These two ratios also suggest the stock is not cheap.

The 14-day relative strength index is 61.58, indicating the stock is neither overbought nor oversold.

Wall Street issued an overweight recommendation rating, meaning analysts believe the stock will outperform either the industry or the market. The average target price is $7.49 per share of First Majestic Silver.

Disclosure: I have no positions in any securities mentioned.

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This article first appeared on GuruFocus.