Primary silver miner First Majestic Silver Corp. (TSX:FR)(NYSE:AG) has seen its market value plummet over the last month to decline by 15%. This is despite the miner reporting second quarter 2018 production of 5.1 million ounces of silver. A primary reason for this has been weaker silver and the less than optimistic outlook surrounding the metal.
The fact that First Majestic had outperformed silver since the start of June 2018 also added to the selling momentum as traders looked to lock in profits. Now that silver is trading at US$15.39 an ounce, which is its lowest point in over a year, the question for investors is whether First Majestic will move higher.
Now what?
First Majestic possesses solid fundamentals, but has reported some disappointing results. For 2017, the miner produced 16.2 million silver ounces, which, while a 13% year over year decline in output, was in accordance with its 2017 guidance.
Disappointingly, First Majestic’s costs for 2017 rose sharply compared to a year earlier. Cash costs were US$7.04 per ounce of silver sold, or 19% higher year over year, whereas all-in sustaining costs (AISCs) shot up by 28% to US$13.82 per ounce.
Nonetheless, despite these tepid results, First Majestic’s second quarter 2018 results point to a significant operational improvement. Total production was 5.1 million silver equivalent ounces, which was a 32% increase both quarter over quarter and year over year. This was driven by a substantial increase in silver output because of the addition of the San Dimas mine as part of the acquisition of Primero Mining Corp., which was completed in May 2018.
According to First Majestic’s CEO and president, that deal would trigger a transformational change in the miner’s production profile, roughly doubling the volume of profitable ounces produced. It also helped to boost company-wide silver grades by 14%, thereby leading to higher recovery rates. Those recovery rates will continue to improve as work on enhancements at First Majestic’s mines are completed during the second half of 2018. That should see an improvement in First Majestic’s operating costs and earnings for the second quarter as well as profitability over the remainder of 2018.
As a result of this solid operational performance, First Majestic has issued guidance for the second half of 2018 stating that AISCs will fall by up to 17% to be between US$13.28 to US$14.84 per ounce produced. If achieved, that will certainly allow the miner to meet its 2018 guidance, thereby giving profitability a much-needed boost in an operating environment weighed down by weaker silver.
While First Majestic’s operations continue to improve the fundamentals, outlook for silver, at least for the short term, is poor. Despite being widely recognized as a precious metal that shares a close relationship with gold, it is silver’s role as an industrial metal that’s a key driver of its value. Even though 2017 was the fifth year in which a physical supply deficit occurred, silver failed to rally, as supply from mining over the last 10-years has grown at a healthy clip and will rise further during 2018.
You see, the key source of silver is not primary silver miners like First Majestic, but as a by-product of mining for other metals, including gold as well as base metals such as copper, zinc, and lead. That sees diversified miners such as Glencore PLC and BHP Billiton Ltd. spin off South 32 Ltd. and Southern Copper Corp., which are ranked among the top 20 silver producers globally.
The sustained rally in base metal prices that began at the end of 2016 has seen those miners significantly expand investment in production and ramp up operations as they seek to cash on higher prices. This means that global supply will keep expanding placing pressure on prices.
So what?
First Majestic is an appealing play on silver, but because of the poor outlook for the metal, its stock will likely weaken over the short term. This is especially true given that First Majestic’s market value significantly outstripped that of silver from the start of May to earlier this month.
