Earlier this week, I received specific intelligence that pertained directly to 5 of our mining companies, so I have been sharing it with you here. This is the last of those 5. The other 4 are below. Be sure to read up on them, and maybe retain a copy, if you care to…
“First Majestic Silver (NYSE: AG)
First Majestic Silver is a $1.7 billion market-cap silver miner.
It owns and operates six high-grade silver mines in Mexico, including La Parrilla, San Martin, La Encantada, La Guitarra, Del Toro, and Santa Elena.
Mexico is the largest silver producer on the planet. The country contributed 189 million of the 875 million ounces of silver produced last year around the world, according to the Silver Institute. That’s 21.6% of the global total. Peru followed with 136 million ounces, and China produced 109 million ounces. Mexico has lower levels of political risk than Peru and China in terms of mining. And it generally has more accessible and reliable infrastructure, like electricity and roads.
Around 69% of First Majestic’s metal production comes from silver… which makes it among the best pure plays in the precious metal. Lead (13%), gold (12%), and zinc (6%) make up the rest. The company has 135 million silver-equivalent ounces as proven and probable reserves (including 100 million ounces of silver). Its total “measured and indicated” resources is 156 million silver-equivalent ounces (including 115 million ounces of silver).
Management expects the mines to produce 12 million to 13.3 million ounces of pure silver this year, and 17.8 million to 19.8 million ounces of silver equivalent. And it’s targeting 20 million ounces in production per year from its current asset base. First Majestic produced 5.1 million silver-equivalent ounces in the first quarter of the year. That’s a 30% increase compared with the same quarter last year.
Among the things we like most about First Majestic is that it runs the company like an operating business. Keith Neumeyer, the president and CEO, founded the company in 2002 and bought his first mine, La Parrilla, outside the city of Durango, Mexico, in 2004. He has always looked for ways to make the business more profitable by trimming costs, buying assets cheap, and only mining the most profitable sites when silver prices decline.
For example, consider the company’s AISC. In the first quarter this year, AISC came in just shy of $9 an ounce – down from around $14.50 an ounce for the second quarter last year. For all of 2015, First Majestic’s AISC totaled $13.43 an ounce – itself a 24% reduction from 2014.
The company says more cost reductions are on the way and estimates AISC will be between $12.29 and $13.36 in 2016. It has cut costs by 50% over the last few years. In particular, Neumeyer said the company is looking to cut costs by increasing its use of automation. In general, Mexican mines tend to be less automated than U.S. and Canadian mines.
Neumeyer also acquired several assets while silver was cheap. First Majestic settled on a deal last October (two months before silver bottomed) to buy out the silver producer SilverCrest.
The acquisition included the Santa Elena mine, located about 90 miles northeast of Hermosillo – the state capital of Sonora. Santa Elena’s proven and probable reserves include 13.5 million ounces of silver and 210,000 ounces of gold. And it looks set to be the company’s biggest producer this year, making up around 26% of First Majestic’s production. First Majestic expects the mine will produce 4.6 million to 5.1 million silver-equivalent ounces in 2016, including 2 million to 2.3 million ounces of silver.
AISC at this mine run between $9.26 and $10.55 per ounce of silver. And the company thinks it can reduce that cost as it implements new operational strategies, such as using natural gas for power generation.
La Encantada and La Parrilla silver mines are First Majestic’s next two biggest mines and should produce close to 3 million ounces each this year. The Del Toro and San Martin mines will each produce between 1.5 million and 2 million ounces of silver. And La Guitarra will account for around 1.2 million ounces. First Majestic also has other projects in development, including the Plomosas, La Joya, and La Luz Silver Projects.
Mining is a capital-intensive industry. So it’s important to find management teams that understand how to manage costs effectively and allocate capital. Neumeyer is a finance guy. He has worked in resource and technology companies and has held senior positions in business development, strategic planning, and restructuring. These credentials are not so common in the mining sector. We’re thrilled to see Neumeyer and his team working for shareholders. It will pay big rewards for long-term investors.
In 2015, First Majestic generated $219 million in annual revenue, but net income represented a loss of $108 million. The company did, however, generate $56 million in operating cash flow. It spent roughly $57 million in capital expenditures (or “capex”), meaning its free cash flow (what’s left after it pays all operating expenses and capital outlays) was in the red by about $800,000.
But now, the trend is up. In the first quarter this year, First Majestic generated $22 million in operating cash flow and approximately $13 million in free cash flow.
As of March 31, the company had roughly $65 million in total debt and about $62 million in cash. Management confirmed last week that it closed a private-placement deal it announced in April for C$50 million (US$38 million). It intends to use the proceeds to expand La Guitarra, advance the analysis at La Encantada, and to boost general exploration and development across all six properties.”
So, there you have it! Though my source had selected these 5 companies for their subscribers… I had selected them for other entirely different reasons months ago. In the particular stock research and analytical program, the database had about 100 gold and silver miners in it. I was able to sort the stocks in the mining industry group by a relative strength measure having to do with their price move. By sorting in that manner, I was able to determine where traders and investors were really putting their money, and jump aboard those that were obviously being chased as the better stocks of the group. This strategy has worked well for me here, as I have been able to place assets within shares of miners, 2 mining funds and 2 royalty firms to generate an almost 67% return on investment since Friday, April 8. I don’t know if anyone investing in this sector has done any better, but I’m perfectly content with it.
Our investment in FSM, since purchased for $4.29 a share on 4/8, has risen to $9.07 with Friday’s close, for a 111% return to date. An examination of the price chart says it is one of the easiest to read, and is saying that it is now in a process of consolidating its most recent gain in the likely anticipation of more to come.
Here’s to your accumulation of real wealth!
Harold F Crowell