This is a quick stock analysis of First Majestic Silver, a $3B silver producer with assets in Mexico and Nevada. First Majestic is one of the world’s largest silver producers, and one of the very few silver companies that pay a dividend. The company is led by an experienced management team, with Keith Neumeyer at the helm.
First Majestic Silver Overview
- One of the largest silver producers in the world.
- Current production of 32 million oz (AGEQ, including gold).
- Current high costs because of issues at their Jerritt Canyon mine.
- Costs should come down in 2023.
- Production is forecasted to rise to 35 million oz (AGEQ) by 2024.
First Majestic Silver Stock Price
FR/AG’s 1-year performance is a negative 34.5% growth. SILJ’s 1-year performance is a negative 22% growth. That’s due to a bad performance of the price of silver. FR/AG has underperformed SILJ, which might mean the stock is more leveraged towards the silver price and might outperform SILJ when silver runs.
First Majestic Silver Company Overview
|Stock Name||Symbol (US)||Type||Category||Share Price (US)||FD Shares||FD Mkt Cap (8/14/2022)|
|First Majestic Silver||AG||Silver||Emerging Major||$8.37||270M||$2.2 billion|
- Cash: $192 million
- Debt: $183 million
- Current Silver Resources: 500 million oz. (350 gpt).
- Estimated Future Silver Reserves: 400 million oz. (AGEQ).
- Estimated Future Annual Silver Production: 35 million oz. (AGEQ).
- Estimated Future All-in Costs (breakeven): $21 per oz.
FR/AG is a large silver/gold producer in Mexico and Nevada. Until recently, they were a very strong company with a clean balance sheet and low costs. Now they have $183M in debt, and their costs are no longer low, although they do have $192M in cash. Their breakeven costs are around $21-$22 / oz AgEq.
They will produce about 32M oz AgEq in 2022. 100% of their revenue comes from silver and gold in about an even 50/50 split. With this much production, they have huge leverage for higher silver and gold prices. They have 3 producing mines in Mexico, plus Jerritt Canyon in Nevada.
They have the potential to create $1 billion in free cash flow at $50 silver prices in 2024 at 35 million oz of silver equivalent production. At a 15x free cash flow valuation, FM should be worth around $15 billion at $50 silver. That is my expectation as long as Mexico doesn’t increase taxes and royalties, and FM hits their production and cost targets.
The red flag for this stock is their high all-in costs (free cash flow), but they have one of the best management teams in the business and should survive a downturn. Their other red flag is their resource total. They only have about 180 million oz (silver equivalent) of reserves (500 million oz of resources). That seems like a lot, but at 35M oz of production, that is only about 5 years of current reserves. Thus, maintaining production could be an issue down the road and could hurt their share price. After all, there are not very many large silver mines left to develop, but they do have 4 development projects plus 26 drilling rigs looking for another large mine.
The good news is they want to become the world’s largest silver miner (AGEQ). That is an aggressive goal. They will need to get lucky with exploration and acquire a few projects. With that aggressiveness, I would expect this company to do well. If they can grow their resources and production, then my future valuation target for them (around $20 billion) is too low. In fact, if quality silver producers are valued at 20x free cash flow, then FM could be a 10+ bagger.
A couple of additional items of interest. They have a pretty good silver steam deal from the Springpole mine that is currently under development in Canada by First Mining Gold. They will get 18 million oz over the life of the mine and only have to pay a maximum of $7.50 per oz. Plus, they could sell extra milling capacity at their Jerritt Canyon mine for additional revenue.
Note: FM has a large potential tax liability from their Primero acquisition on the way the silver stream is taxed (from 2010 until current). On their most recent MDA on Sedar.com, they list a potential $185 million tax liability and state that it does not include interest and penalties. Ouch.
I doubt they will have to pay the entire amount, but the liability appears to be growing because they have not changed their accounting to match what the Mexican tax authority deems appropriate. Currently, they are in negotiations with the Mexican tax authority regarding this liability, and it appears they have refused to pay it. Mexico is now asking for $500 million in taxes. This will put downward pressure on the stock until it is resolved.
Is First Majestic Silver a Good Silver Stock to Buy?
Below, I will provide my scorecard for First Majestic Silver. The closer the overall grade is to 10, the better investment FR/AG is.
- Properties/Projects: 8
- Costs/Grade/Economics: 6.5
- People/Management: 8
- Cash/Debt: 7
- Location Risk: 6.5
- Risk-Reward: 7
- Upside Potential: 7.5
- Production Growth Potential/Exploration: 7
Overall Rating: 7
Is First Majestic Silver a Good Company?
Below, I have provided a few positive things about FR/AG.
- Significant upside potential.
- Management is very strong.
- Production growth projected.
- Investor interest once PM prices rise.
Is First Majestic Silver a Bad Company?
Below, I have provided a few negative things about FR/AG.
- High costs for their gold mine (Jerritt Canyon).
- Most of their operating mines are in Mexico, which adds location risk.
- Reserves are low for their projected production.
Is First Majestic Silver an Overvalued Stock?
Briefly said, no, FR/AG stock is not an overvalued silver stock. As per my calculations, it has over 6X potential in the medium to long term. I do think most real silver companies are currently undervalued as I think the silver price should be much higher than $20. I think it should be at least $50. If you don’t share my opinion on the silver price, the valuation provided below will be worthless to you.
Below, I have provided my value estimate for FR/AG stock, at $50/oz Ag. Yes, it’s a high silver price but I am only looking at silver stocks because I think the price of the metal will go up to at least $50/oz over the medium to long term.
- Annual production estimate: 35 million oz.
- All-In Costs (breakeven): $21 per oz.
35 million oz. x ($50 – $21) = $1 billion annual FCF (free cash flow).
- $1 billion x 15 (multiplier) = $15 billion
- Current FD market cap: $2.2 billion
Upside potential: 580%
Is First Majestic Silver a Risky Investment?
Yes. Every mining stock is a risky investment and should only be approached by people who are not afraid to lose all of their money. Nonetheless, I have provided a risk-reward estimation below to give you a better idea of the specific risks with this stock.
- The main risk is the silver price. Unless it rises, you likely won’t be making money with silver stocks. In fact, a volatile silver price will likely put you underwater at some point, and perhaps significantly down.
- Another risk factor is Mexico, which may not remain mining-friendly all the way to 2026.
- The third major risk is their high costs at Jerritt Canyon. It’s possible they could shut-in JC, which would hurt the stock. If they don’t get their costs down at JC in the next few quarters, they might have to pull the plug.
Taxes and royalties can increase and zap the share price. Inflation or other factors can push up costs. A myriad of things can go wrong.
To take on this high risk, the reward has to be high. A 200% or less return, in my opinion, is simply not enough for accepting this project’s high risk. We want outsized returns. For First Majestic Silver, the upside potential is very high and enticing, although it is a speculative bet for the long term. We are expecting the silver price to rise and for them to generate $1 billion in FCF at $50 silver. That is an assumption that may not occur.
Will I Invest in First Majestic Silver?
I’m a fan of chasing FCF, and I prefer undervalued quality producers. They fit in nicely with my investment strategy. Sure, they have high costs, but if silver prices trend, they have huge leverage from their high production. There are not very many large silver producers, and I want to own all of them (unless they have too many red flags).
They have a few red flags, but their leverage to the silver price makes the risk-reward enticing. Plus, their large size makes them attractive because they are likely to survive a prolonged downturn. They could easily be a highflyer. And if silver prices trend all the way to $75 or $100, that is icing on the cake.
More Analyses From Don Durret
Find my previous Resource Talks articles here.
Thank you for reading, and don’t hesitate to correct me in the comments if you think I’m wrong.
– Don Durrett.
Don Durrett is not an investment advisor. Don Durrett has a high risk appetite. Don Durrett might own, buy, and/or sell shares of companies discussed herein without prior notice. Resource Talks is not responsible for the quality nor accuracy of information provided herein. Resource Talks is not receiving financial compensation from any company for the publication of this article. Don Durret is receiving financial compensation from Resource Talks for the production of this article. The information provided in this publication – and all other publications by Resource Talks – is impersonal in nature and meant for general information purposes only. Before taking any action on any investment, it is imperative that you consult with multiple licensed, experienced, and qualified investment advisors. Get numerous opinions before taking your own decision in the end. The minimum risk on any investment mentioned in this publication is 100% loss of capital.
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Readers are cautioned that this opinion (blog post) contains forward-looking statements about expected future events and the financial and operating performance of the company/investment discussed herein. Reality often varies from management/writer’s expectations. Readers are encouraged to read the Cautionary Note on Forward-Looking Information and to consult the Company’s Annual Information Form, which is available on www.sedar.com.