Big Upside in This Silver Mine

By Piyush Arora - October 30, 2012 | Tickers: CDE, AG, FSM, SLW, SVM | 0 Comments

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Many investors prefer to not invest directly in silver because the commodity’s volatility is too high. It is due to this reason that investors are more willing to invest in silver mining companies like First Majestic Silver Corp (NYSE: AG). Unlike silver streaming companies, the silver mining business model is not highly leveraged. Even if silver prices consolidate at inflated levels, the company would make profits.

First Majestic recently announced that silver production had reached record levels in October, with 2.438 million ounces of silver produced in a single quarter, which was a massive 36% increase over last year’s quarter. The company currently owns and operates four mines in Mexico, and management expects silver production to be around 9.5 million ounces in the current year. Additionally, management expects to produce 3 million ounces of silver quarterly and 16 million ounces of silver annually by the end of 2014.

The mining company also produced 3.3 million pounds of lead, up 75% from last year’s quarter and 0.84 million pounds of zinc, which doubled from the same period last year. Quarterly gold production also witnessed an astonishing increase, 276%. The record production levels were partially due to the recent acquisition of Silvermex. In the last earnings release by Silvermex, the company’s quarterly silver produce stood at over 100,000 ounces of silver, and under 1000 ounces of gold.

However, in the recent earnings release, First Majestic reported a 50% decline in earnings. Revenues slid by 19%, all due to the reduced prices of silver. The company sold 1.88 million ounces of silver in the last quarter, at an average price of $28.69/oz.

Silver prices, however, are on a rebound, and the monthly average price of silver now stands at $33.15/oz., up 15.5% from the previous quarter. The average price of silver for the current quarter stands at over $32, which is up nearly 12% from the previous quarter. Additionally, silver production is already up 36%, and according to my calculations; First Majestic should experience at least 44.5% increase in revenues and an 11.6% increase in gross profits compared to the previous quarter.

The company shares its market space with Coeur d'Alene Mines (NYSE: CDE), Silver Wheaton (NYSE: SLW), Fortuna Silver Mines (NYSE: FSM) and Silvercorp Metals (NYSE: SVM).

As seen from the attached chart, over a period of 6 months, First Majestic has outperformed all of its mentioned peers in terms of stock returns.

AG data by YCharts

On taking a look at the financial metrics of all mentioned companies, analysts expect the EPS of Coeur d'Alene Mines to grow at the fastest pace over the next year, with First Majestic second in line. However, the financial metrics suggest that First Majestic is the most undervalued stock among its peers, and has the best price to sales ratio as well.

The record production levels suggest that management is bullish on silver. Though the company reported gloomy financial results this quarter, I strongly believe that the current quarter would bring good numbers thanks to the increased production levels and increasing silver prices. First Majestic also has a good mix of fundamentals and has outperformed its peers in terms of stock returns, and it is due to these reasons I’m bullish on the company.

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