First Majestic’s ‘bittersweet’ second quarter

VANCOUVER — Based on pure production metrics, First Majestic Silver (TSX: FR; NYSE: AG) has a lot to celebrate about its second quarter. But the significant drop in silver prices during the period put a damper on the miner’s financial results, resulting in the adoption of new cost-cutting measures and the suspension of silver sales.

Precious metals have taken a pounding recently. Silver was down 30%, or US$10.14 per oz. during the period, falling from highs of near US$30 per oz. to around US$19.50 per oz. at press time. This is a bracing reality for First Majestic, which is setting production records as it ramps up its newly commissioned Del Toro silver mine in the municipality of Chalchihuites in Zacatecas State, Mexico.

The company managed a 44% year-on-year jump in quarterly silver production over the past three months, with its five Mexico-based mines — La Encantada, La Parrilla, San Martin, La Guitarra and Del Toro — cranking out 2.8 million oz. silver.

First Majestic also saw a jump in its quarterly by-product metal production year-on-year, with lead output up 98%, zinc up 104% and gold up 274%. Quarterly totals for by-product metals totalled at 5.9 million lb. lead, 2.9 million lb. zinc and 2,000 oz. gold.

“The second quarter was somewhat bittersweet, as total production achieved a quarterly record of over 3 million oz. for the first time in [our] history, while at the same time unfortunately experiencing one of the most dramatic and violent drops in the price of silver,” says president and CEO Keith Neumeyer.

In May First Majestic cut its overall capital budget for 2013 by more than US$30 million, with a focus on exploration and development. The company remains in cost-savings mode — having chopped another US$20 million since its May announcement — with a full review targeting third-party contractors and 10% less manpower by year-end.

“This low silver price is creating a challenging environment for many higher-cost primary producers. Our management team has responded to the situation by implementing prudent cash-management practices and disciplined cost-reduction measures to ensure [our] profitability and future growth plans remain intact,” Neumeyer adds.

Exploration may have taken the biggest hit, with First Majestic dropping its drilling campaign to around 15,000 metres for the year. In comparison the company completed 25,500 metres during the second quarter with 13 diamond drill rigs, but because of the cutbacks, it intends to use only its own equipment and personnel.

First Majestic has also phased out its vice-president of exploration role and merged the position with its regional manager of exploration.

On the development side, the company reduced its underground expansion by 13% quarter-on-quarter to 13,500 metres, which is part of a planned capital savings to lower costs this second half.

The company is reviewing its development plan to ensure cutbacks do not impact growth, since some of the programs are focused on preparing underground access and stopes for higher production rates.

First Majestic also suspended silver sales in hopes of boosting  profits later in the year. At the end of June the company had around 700,000 oz. silver in its inventory that it expects to sell during the third quarter.

The move was not exactly a winner in the eyes of one observer, with BMO Capital Markets analyst Andrew Kaip calling First Majestic’s second quarter “mixed” in a July 10 research report.

“Production was above BMO expectations, and [First Majestic] is demonstrating that it is reacting quickly to the new silver price environment,” Kaip writes, maintaining his “industry underperform” rating and $13-per-share price target on the stock. “However, BMO Research views the temporary suspension of silver sales as questionable.”

First Majestic remains in a good position despite its capital cutbacks. The company has a strong portfolio of exploration-stage assets, and once it finishes expanding Del Toro in late 2014, the mine will be running at 4,000 tonnes per day and be producing 6 million oz. silver per year.

First Majestic reported working capital of US$110 million at the end of the first quarter, and generated net earnings of US$26.5 million.

The Vancouver-based company has traded within a 52-week range of $9.25 and $24.18, and jumped around 4% — or 43¢ per share after releasing its second-quarter results — before closing at $12.13 per share at press time.

First Majestic maintains 117 million shares outstanding for a $1.4-billion market capitalization.