First Majestic to join top-tier silver miners

First Majestic Silver (FR-T, AG-N) is eyeing senior producer status as it expands Del Toro — its fifth silver mine in Mexico — and improves operations at its four other mines in the country to drive its annual silver production rate 16 million oz. silver over the next two years.

“This is the year we will break through the 10 million oz. mark, which is the industry number of becoming a senior producer.  We will actually exceed that number and get close to 12 million oz.,” says Todd Anthony, the company’s manager of investor relations. “The goal by the end of next year is to reach a rate of 16 million oz. per year. But the growth doesn’t stop there,” Anthony says, adding that First Majestic will keep pursuing growth opportunities in Mexico.

Asked how First Majestic was able to stay for the most part on track to inaugurate Del Toro given the tough capital markets and dropping metal prices, Anthony points to Del Toro’s impressive economics. 

“A lot of these other projects — and I won’t mention any names — they have a very high capex requirement, and some of these projects are in the hundreds of millions of dollars. The financing window is unfortunately closed for most of them, and they are not able to raise the funds to build these projects. So they have had to delay them or write them off. Del Toro is the largest investment in Mexico in the company’s history, and it was only US$124 million. It has an [after-tax] internal rate of return of 49% at US$25 silver, so it’s robust. This is why we can continue to move forward with that project.”

The Del Toro mine, located in the municipality of Chalchihuites in Zacatecas state, came online on Jan. 23 this year, and reached commercial production on April 1. The 148,084 oz. silver that Del Toro churned out during the first quarter were considered pre-commercial and not included in the total commercial silver-equivalent production of 2.6 million oz. from its La Guitarra, La Encantada, La Parrilla and San Martin mines.

If included, first-quarter output rises to 2.73 million equivalent oz. silver, up 36% over the same period last year. The miner also produced 4.1 million lb. lead, 1.7 million lb. zinc and 1,584 oz. gold as by-products from 730,000 tonnes averaging 181 grams silver per tonne. 

“The first quarter of 2013 marked yet another milestone for First Majestic,” Keith Neumeyer, the company’s president and CEO, says about Del Toro’s launch.

“Production was better than BMO Research’s expectations, and FR’s numerous development projects are showing progress on multiple fronts,” analyst Andrew Kaip adds. Kaip has an $18 target price and “market perform” rating on the stock.

The mid-tier producer is undertaking four major development projects to expand its operations as part of its growth plans. These include developing Del Toro, expanding the mill capacities at both San Martin and La Guitarra and installing a new underground haulage system at La Parrilla.

During the first quarter, First Majestic completed the first phase of Del Toro’s plant construction, installing a 1,000-tonne-per-day flotation mill, where throughput equalled 781 tonnes per day averaging 162 grams silver, 2.4% lead and 2.8% lead.

Since reaching commercial levels on April 1, throughput at the mine has increased to 916 tonnes per day averaging 190 grams silver, 2.9% lead and 2.7% zinc. The company aims to expand Del Toro as it works on the second phase of development, where it will add a 1,000-tonne-per-day cyanidation circuit to bring throughput to 2,000 daily tonnes in the third quarter.

Once the cyanidation circuit is up and running, First Majestic should produce its own silver doré bars, reducing third-party smelting and refining costs.

As part of the mine’s third and last development phase, First Majestic intends to complete building a shaft, which will help double the capacity at both the flotation and cyanidation circuits to 2,000 tonnes per day, pushing the combined throughput to 4,000 daily tonnes by late 2014.

Once it reaches this rate, Del Toro should produce 6 million oz. silver a year, along with lead and zinc by-products, becoming First Majestic’s largest mine.

Currently that title belongs to its La Encantada silver mine, sitting 700 km northeast of Torreon, Coahuila, in northern Mexico, where First Majestic is continuing underground development and production from the San Francisco vein.

Meanwhile, First Majestic is advancing its San Martin and La Guitarra silver mines. At La Guitarra — located 130 km southwest of Mexico City — it recently upgraded the mill to 500 tonnes per day from 350 daily tonnes, and is waiting on permits to expand the mill to 1,000 tonnes in early 2014.

Meanwhile, it is increasing the mill capacity at San Martin to 1,300 tonnes per day by July. The San Martin mine is located 250 km north of Guadalajara city in Jalisco state.

At the La Parrilla silver mine, 65 km southeast of Durango, a new US$20-million underground haulage system is being installed to replace the above-ground trucking system, improving logistics and ore transportation to the mill. The new haulage system should be operational in 2014.

To help with its ongoing development projects, First Majestic has 17 drills turning on its five wholly owned operations, and aims to release an updated technical report for each mine by year-end.

First Majestic also intends to trim its capital expenditures this year, saying it will provide more details in its first-quarter financials in May. But it expects to spend most of its capital in Del Toro.  

“Del Toro is the big focus this year,” Anthony says. “It will double the size of the company over the next eighteen months.” 

For 2013, First Majestic is guiding production of 12.3 to 13 million equivalent oz. silver, or 11.1 to 11.7 million oz. silver. Cash costs are pegged at US$8.56 to US$9.15 per oz. silver. BMO Research forecasts the company will generate payable production of 12.4 million equivalent oz. silver at a co-product cash cost of US$11.67 per oz.

First Majestic recently closed at $12.05 within a 52-week range of $11.06 to $24.18. It has US$100 million in cash and is one of Raymond James’ preferred silver producers, highlighting that the company has a “robust production and cash-flow growth profile, a competent management team, low geo-political risk and a predominantly pure-silver metal mix.” Raymond James has a $21 target and rates the stock as an “outperform 2.”

BMO analysts are expecting 2013 and 2014 silver prices of US$29.53 and US$32 per oz., and forecast a long-term price of US$24 per oz.

The spot silver price closed May 2 at US$24.06, dropping 20% year-to-date.