First Majestic Silver Corp. (AG)

[Edge83]

First Majestic: Positive Updates On My No. 1 Overall Silver Stock Pick For 2017

Feb. 24, 2017 1:26 PM ET|70 comments| About: First Majestic Silver Corp. (AG) by Gold Mining Bull

Summary

First Majestic was listed as my No. 1 silver stock to own in a list published back on Dec. 5, 2016.

The company just released financial results for Q4 and full-year 2016.

I break down First Majestic's results and give my updated thoughts/analysis of the stock.

First Majestic Silver: An Update on My Top Silver Stock Pick

First Majestic Silver (NYSE:AG) just reported its Q4 and full year 2016 financial results, and overall I thought it was a pretty solid quarter for the Mexico-focused silver miner. For 2016, the company produced both higher production and lower costs, leading to a substantial increase in mine operating earnings and cash flow.

For some background: First Majestic is one of the largest pure silver producers in the world. It owns six producing silver mines in Mexico, plus two development projects and one exploration project. The 2-4 goal of the company is to increase its annual silver-equivalent production to over 20 million ounces, while maintaining low operating costs.

I previously listed the stock as my top overall silver stock to own for 2017, after previously listing it at the No. 4 spot on my 2016 list. The stock traded at $9.66 at the time, basically unchanged from the current stock price. I pointed towards strong organic growth and a reduction in cash costs at several key mines as two major positives that will drive the stock price higher in 2017 and beyond. As I pointed out in that article, First Majestic also had a solid balance sheet at the time, with $122.5 million in cash and just $34.6 million in debt at the end of Q3.

In Q4, it was business as usual for First Majestic. The company produced 4.4 million silver equivalent ounces with all-in sustaining costs finishing at $12.90 per ounce, up 14% from last year but just a slight increase from last quarter. Its revenue was basically unchanged at $66.2 million, and it produced mine operating earnings of $9.9 million (154% increase) and operating cash flow of $23.4 million ($.14 per share).

On an annual basis, the results look more impressive. First Majestic ended the year producing 18.7 million silver equivalent ounces, a 16% jump from the prior year. Its all-in sustaining cash costs fell by 20% to $10.79 per ounce. Meanwhile, average realized silver prices rose 7%, from $16.06 to $17.16 per ounce.

Due to the higher production, higher silver prices and lower costs, First Majestic reported an 80% increase in operating cash flow ($107.3 million in 2016), and a massive 464% jump in mine operating earnings ($49.2 million). Its cash and cash equivalents position swelled 153% to $129 million, while working capital improved 737% to $130.6 million. Meanwhile, First Majestic's debt balance is just $31.5 million as of Dec. 31, 2016, according to its annual report.

While the increase in cash and working capital is also partly due to the closing of a $57 million equity financing completed in May, the financing was done at a time when First Majestic shares traded at a reasonable price in my opinion. The company issued 5,250,900 common shares at a price of C$10.95 per common share, and while this is lower than the current share price, silver prices were about 10% lower at the time. It would have been much more painful had the company issued new shares when the stock hit 52-week lows in late-December, at $6.78 per share.

First Majestic had a solid year in my view and the company is in a great position to achieve its organic growth plans and may even complete an acquisition or two in 2017. First Majestic will invest a total of $124 million on capital expenditures in 2017, which includes $46.2 million of sustaining capital and $77.8 million for expansionary projects.

However, with its solid cash position and strong operating cash flow, I think the company can easily fund these expenditures and still have money for a deal in 2017. Organically, the company is preparing for the upcoming expansion at its La Guitarra mine, and will also be continuing exploration at Plomosas, with a new Preliminary Economic Assessment planned in 2018.

For 2017, First Majestic has guided for silver equivalent production to fall between 16.6-18.5 million ounces, with AISC ranging from $11.96-$12.88 per ounce. With silver prices trading above $18 per ounce, it should be a profitable year for the company. While this likely will represent flat or lower production, the company's 2-4 growth plan is still intact, as it aims to increase production to greater than 20 million ounces (and potentially as high as 25 million ounces), once its Plomosas and La Luz mines come online in a few years. In my view, it has the cash on hand, the operating cash flow and the right management team to achieve these growth plans.

In conclusion, while First Majestic's stock hasn't done much since I listed it as my No. 1 overall silver stock to own back in December, I'm still quite bullish on the stock, especially following this strong earnings report. I think this is arguably the best pure silver stock to own, since 70% of First Majestic's revenue comes from silver. Its organic growth pipeline and low AISC give it the edge over its peers in my view.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

http://seekingalpha.com/article/4049452-positive-updates-1-overall-silver-stock-pick-2017