First Majestic Stock Will Rally When Precious Metals Do (NYSE:AG)

First Majestic Silver (NYSE:AG) is a silver mining company that we have traded in the past. We believe the pressure on precious metals has been overdone in this inflationary environment, especially when you factor in the contagion hitting stocks and bonds. Make no mistake, this market is in bad shape with sentiment being so low. The Federal Reserve put out another 75 basis point hike in rates, while inflation has not subsided. It is no surprise that investors are nervous, and the market has been moving lower and lower, with some handfuls of rallies. All of this Fed-induced market pain is creating ample opportunity to generate alpha in the medium term in this market. The precious metal miners are down this year, but the stocks have mostly traded sideways. We think gold and silver will find footing once the dollar continues its long path of weakening, despite ascending all year. The dollar eventually will continue declining in our opinion once markets have stabilized in 2023 following all of the rate hike action.

It is our belief that you need to have silver and gold exposure for the long-term, and in the medium-term presently given that inflation threats are everywhere, you should still own some. We think 2-3% of your portfolio should be in this asset class. While we prefer physical holdings, followed by the ETFs that track them, and then the streaming and royalty companies, the miners can make you some solid money if you time your entry efficiently. First Majestic Silver on big dips makes for a solid stock to own in the space. Performance has been about as expected, and will rally if the prices of silver and gold rally. Let us discuss.

Gold and silver have pulled back

With silver and gold having pulled back from highs in the last year, we think there is opportunity to build a position on big pullbacks in this stock given that the immediate inflationary pressures have only increased. The signs are everywhere, and frankly it is borderline hyperinflation. All of the Federal Reserve action thus far have had little impact on inflation, as evidenced by today’s CPI report. We think the environment is ripe for owning precious metals. In the last few months they really have not done much despite inflation, perhaps because the market is handicapping disinflation, but it has not occurred. With currency instability, precious metals should still work. But as the dollar falters and/or yields come down, expect rallies.

Recent performance

The recently reported earnings from First Majestic appear were a miss, but production was up nicely. There were some positives and negatives to be aware of but we still see shares as a buy. The company missed on the top and bottom line, mostly as a result of lower silver prices. In addition, the company reduced its CAPEX to help save money, which we like in a lower price environment. At the same time, the company is enjoying low all-in sustaining costs, or AISC.

Obviously, metals prices matter tremendously to miners in the space, but so does volume, and it was the latter that led to some underperformance, at least on the headlines. That said, the higher the pricing, the better the margins on ounces produced. Revenues totaled $159.4 million, an increase of 3% compared to Q2 2021. Metals prices were down year-over-year 12%, and down 10% from Q1 2022. First Majestic realized an average silver price of $23.93 per ounce. While the prices were down, it came with a solid increase in production. Total production was 7.705 million silver equivalent ounces, consisting of 2.8 million ounces of silver and 59,391 ounces of gold. These were also nice increases from last year representing an increase of 20% from a year ago. They were helped by the inclusion of a full quarter of production from Jerritt Canyon and the processing of the Ermitaño ore at the Santa Elena mill.

Costs are manageable and can be improved

With metal prices declining, First Majestic will need to improve on costs to sustain nice margins. Cash cost for the quarter was $14.12 per silver equivalent ounce, compared to $14.94 per ounce in the previous quarter. We like that costs are being contained in this environment of lower prices. The company has implemented a number of costs saving measures in an effort to combat the inflationary impacts we are seeing with labor, fuel, and more. Higher grades were also a benefit.

When we factor in total production, the costs to produce the volume generated, and the final average selling prices, overall the company posted fine earnings when we consider that the company did inventory 0.2million ounces to wait for better prices. The company still has strong margins, but the costs need to be reined in further. Adjusted net loss for the quarter was $5.7 million or EPS of -$0.02. Ouch. This missed estimates by $0.02 as consensus was for breakeven in the quarter. The company did have positive cash flow per share, and ended the quarter with a healthy balance sheet. First Majestic has cash and cash equivalents of $117.7 million and restricted cash of $141.6 million, for a total of $259.3 million.

Looking ahead

As we look ahead, the company is repurchasing shares. After the quarter ended, it repurchased another 100,000 shares. Production sites are ramping to full capacity. The company will be reducing CAPEX and also will be continuing to implement cost savings measures. Make no mistake, this stock is an option play on the price of gold and silver. When these metal prices rise, the stock will rise as well. For now, we think you wait for another pullback, then do some buying.