First Majestic Silver (AG) is a mining company focused on silver production in Mexico. It has been nearly a year since we checked in on the name. We like this miner because it is aggressively pursuing the development of its existing mineral property assets, and plans to ramp up production. First Majestic presently owns and operates six producing silver mines; the La Parrilla Silver Mine, the San Martin Silver Mine, the La Encantada Silver Mine, the La Guitarra Silver Mine, Del Toro Silver Mine and the Santa Elena Silver/Gold Mine. The purpose of the present column is to check in on the company’s performance, honing in on production and the finances of the company. Further, we will discuss our expectation for the company going forward.

Stock price action

The stock is, of course, correlated the price of precious metals, namely silver, however, operationally the stock has faced pressure due to operational weakness in 2017:

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Source: Yahoo finance

As you can see, the stock has been under pressure for the last year. This is in large part due to some of the operational issues we have seen in 2017. Let us discuss.

Production numbers

Production was down year-over-year, but this was expected. Total production in 2017 was 16,207,905 silver equivalent ounces, in the mid-point of First Majestic’s guidance of 15.7 to 16.6 million silver equivalent ounces.

This represents a decrease of 13% compared to the previous year. The decrease in metal production can be attributed to lack of investment in underground development over the previous three years, which has had a direct impact on throughputs and grades.

Here is a key point. This trend is expected to begin to reverse as a result of 2017 and 2018 investments in development and exploration. The increase in development and exploration investments represent 43% over 2015 and 31% over 2016.

First Majestic produced 9.7 million ounces of silver in 2017, representing an 18% decrease compared to 11.9 million ounces produced in the previous year.  The decrease in production was primarily attributed to lower throughput as a result of lower head grades and some issues with workers.

Costs were up too, but at and below guidance

Cash cost per ounce in the year was $7.04, an increase of $1.12 per ounce compared to the previous year and at the low range of First Majestic's 2017 guidance of $7.00 to $7.75 per ounce. The increase in cash cost compared to the prior year was primarily due to lower production and higher energy costs attributed to the Mexican government's oil and gas deregulation policies that came into effect in the first quarter of 2017, partially offset by a decrease in smelting and refining costs and higher by-product credits per ounce.

All in sustaining cash costs per ounce in 2017 was $13.82, an increase of $3.03 per ounce compared to the previous year and below the 2017 annual guidance of $14.40 to $15.50 per ounce. The increase in all in sustaining cash costs per ounce was attributed to higher cash costs and higher sustaining capital expenditures as First Majestic began re-investing in development and exploration at each unit.

Investments were up

First Majestic’s total capital expenditures in 2017 was $81.4 million, an increase of 24% compared to the prior year, consisting of $32.7 million for underground development, $25.0 million in exploration and $23.7 million in property, plant and equipment. Total investments, on a mine-by-mine basis, primarily consisted of $18.0 million at Santa Elena, $12.5 million at La Encantada, $8.6 million at Del Toro, $15.3 million at La Parrilla, $10.8 million at San Martin and $9.8 million at La Guitarra. We are very pleased to see investments being made which should lead to higher growth.

Financials that you need to be aware of

Full-year revenues totaled $252.3 million, a decrease of $25.8 million or 9% compared to 2016, primarily due lower production from all mines except for San Martin which increased 5% compared to 2016.

First Majestic realized an average silver price of $17.12 per ounce in 2017 and consistent compared to the 2016 realized average silver price of $17.16.

Adjusted earnings were a loss of $0.04, compared to earnings of $0.12 in 2016. Most of the differences were a result of First Majestic taking an impairment charge on the Del Toro Silver Mine This charge amounted to $65.5 million, or $42.4 million net of tax, resulting in a total net loss of $53.3 million (loss per share of $0.32) in 2017 compared to net  earnings of $8.6 million (earnings per share of $0.05) in 2016.

First Majestic ended 2017 with $118.1 million in cash and cash equivalents compared to $129.0 million at the end of 2016. In addition, First Majestic ended the year with a working capital surplus of $116.3 million compared to $130.6 million at the end of 2016.

While the year was painful, it explains the drop in share prices. However, we truly believe we have a mismatch in pricing here because stocks are supposed to be priced based on future expectations. Future expectations are looking strong, and we think 2018 is a turnaround year.

2018 expectations

We know that First Majestic plans to invest a total of $125.4 million on capital expenditures in 2018 consisting of $51.0 million for sustaining requirements and $74.4 million for expansionary projects. Here is why we are bullish. First Majestic is preparing for future production growth by developing additional mine production levels at each of the mining units, completing the roasting circuit and commencing block caving production at La Encantada, in addition to the exploration work at Plomosas which is expected to result in an initial resource estimate by the end of 2018.

As for expected production, we are looking for 10.6 to 11.8 million ounces of pure silver or 15.7 to 17.5 million ounces of silver equivalents, a rise of 8% at its highest levels. We expect costs to be comparable to 2017, but given our expectation for silver at $17.50, this will help margins and the bottom line when coupled with the production increase. We foresee earnings per share of $0.07 to $0.11 on $335 to $350 million in revenues. All things considered, we are cautiously bullish.