First Majestic shares pop on second-quarter financials

VANCOUVER — Despite a steep drop in net income over the past three months, silver producer First Majestic Silver (TSX: FR; NYSE: AG) continues to impress investors. The company’s stock jumped 9.3%, or $1.26 per share, following news of its quarterly financial results on Aug. 14, en route to a $14.85 close that day.

First Majestic reported net earnings of US$200,000 during the second quarter, which marks a 99% drop compared to the same period in 2012, when the company posted earnings of US$26.5 million, or 23¢ per share. Cash costs rose around 7% year-on-year to US$9.43 per oz., while production grew by 55% to 3.3 million equivalent oz. silver. First Majestic also saw a 22% increase in its average head grade to 201 grams silver per tonne mined, with the largest gains being realized at the company’s La Encantada and San Martin silver mines in Mexico where grades jumped 17% and 32%.

First Majestic’s net income drop can be attributed to a decision during the second quarter to hold back 700,000 oz. silver inventory due to low metal prices. According to president and CEO Keith Neumeyer, the company’s quarterly results would have been “much more robust” had it not opted to suspend silver sales, but it did not make a “single sale in the form of doré” under US$22.80 per oz.

“We spent most of the month of June under [US$20 per oz. silver], and that’s why I made the decision to hold back those ounces. And obviously, by making that decision, we profit by a couple of million dollars extra in the third quarter, which is a nice thing,” Neumeyer added during a conference call. The company has since sold much of its inventory, with roughly 150,000 oz. remaining as of Aug. 12.

First Majestic marked the first commercial quarter at its newly commissioned Del Toro silver mine in Zacatecas, Mexico. The project was initially budgeted at US$124 million, and is eventually slated to run at 4,000 tonnes per day and contribute 6 million oz.  silver annually, plus lead and zinc credits. Del Toro cranked out 370,000 oz. silver, 2 million lb. lead and 1.1 million lb. zinc during the quarter, as its flotation mill averaged 905 tonnes per day at a 72% recovery rate and a head grade of 216 grams silver.

“With the metal prices dropping so substantially and our revenues dropping, we’ve got major cash burn at Del Toro, and that’s an important project for us to complete,” Neumeyer said, noting that silver prices fell 31% in the second quarter, which is the largest quarterly drop since the 2008 financial crisis and the third-largest quarterly drop in the past 50 years.

“And that’s really our priority. Whatever happens, Del Toro is going to be completed. It’s our largest capital expenditure program in the company’s history and will become our largest silver mine, so we have to get that finished.”

The company has been forced to revisit some of its market strategies in the face of lower metal prices. First Majestic had proposed a 5.8-million share repurchase program in early March, but limited itself to a US$2.4 million buyback in the second quarter that resulted in the cancellation of around 215,000 shares.

Neumeyer described the repurchase program as “a luxury” and said that once Del Toro is up and running and metal prices improve, the company will look at investing further cash in the program.

First Majestic has cut US$50 million from its capital budget so far this year, and the idea of instituting a dividend in 2013 now looks to be on hold.

“We’ll revisit the dividend at our annual meeting in December,” Neumeyer said. “It will depend on the silver price in this overall economy. I don’t want to be implementing a dividend and taking it away, but as a significant shareholder myself, I’m supportive.”

First Majestic shares have traded within a 52-week range of $9.25 and $24.18, and jumped around 27%, or $3.17 per share, during the second quarter.

The company maintains 117 million shares outstanding for a $1.7-billion press time market capitalization.