First Majestic Silver: Disappointing Performance Amid Higher Pricing (NYSE:AG)

First Majestic Silver Corp. (NYSE:AG) is a silver mining company that we have traded several times in the past. In our last coverage we recommended a tactical short which led to very nice returns. Now we are in a higher metal price situation, though performance continues to disappoint. However, we are lifting that sell call to a hold now given the pricing environment, but we are not buyers of the troubled miner. Let us discuss performance in the recently announced Q3 production report.

Q3 production disappoints

When the company reports fiscal earnings, we think we will see a bump from both metal prices and from efforts to reduce costs. Those results will be out in early November (expected during market hours on November 2nd), but the Q3 production report was disappointing. We move to neutral on the name given the production numbers but expectations for better selling prices. We cannot justify a buy.

Why metals prices are getting a boost

A major driver of performance is the price of silver, gold, and by-products produced and sold. But it is a commodity and the pricing matters to miners, and that pricing is better, but production disappointed. Gold and silver are getting a boost from issues with economic uncertainty as well chaos in the Middle East, as well as ongoing conflict in Ukraine. This uncertainty, it is driving up metal prices. This normally lifts precious metal mining stocks, and although we see issue with First Majestic, we do not see the stock heading lower in this pricing environment.

Operations

The company’s has three producing operations. The mines are the San Dimas Silver/Gold Mine, the Santa Elena Silver/Gold Mine, and the La Encantada Silver Mine. The production is tracking potentially to miss 2023 estimates. In Q3, production was below the 6.5 to 6.7 million silver equivalent ounces we thought we would see. Production was 6.3 million silver equivalent. This production consisted of 2.5 million ounces of silver and 46,720 ounces of gold. So where are we year-to-date? We are tracking slightly below the pace needed for the year to hit the midpoint of guidance. Through the first three quarters First Majestic has produced 7.6 million ounces of silver and 152,336 ounces of gold for total production of 20.2 million silver equivalent ounces, or 74% of the guidance midpoint for the year of producing 26.2 to 27.8 million ounces.

Thus, Q4 will need to see 6.8 million equivalent ounces to get to the midpoint. At this point, we think we come in below the midpoint.

Production up from Q2 overall, but two mines are lagging

The production was 5% higher than a weak Q2 production print, but still lagged our expectation. There were higher tons milled with better grades. It is not all bad news despite our expectations. Santa Elena has been a bright spot, with Ermitaño’s metal recovery and mill throughput reaching another quarterly record in Q3, along with the aforementioned high silver and gold grades. Santa Elena produced 2,669,336 silver equivalent ounces. There were 47,941 ounces of silver produced as well as 28,367 ounces of gold. This was a solid 49% increase, and was a result of higher silver and gold grades in the quarter.

But San Dimas and La Encantada have underperformed, dragging down overall performance. San Dimas saw production of 3,010,377 silver equivalent ounces in Q3. This was made up of 1,548,203 ounces of silver and 17,863 ounces of gold. While that may sound like a lot of production, silver and gold production decreased 8% and 13%, respectively, compared to the prior quarter. This came as there was a 6% decline in throughput combined with lower silver and gold grades. But over at La Encantada, we saw declines of 29% in production. There was a collapse of a well which may be a short-term problem, but it led to less water available for work.

Final thoughts, we are moving to neutral

So here is the deal. If we were at prices from a few months ago, we probably would keep a sell rating on First Majestic Silver Corp. stock with these production ratings, but the higher metal prices will lead to some nice margins. Despite lower production, returns on metals sold should provide a boost. As such, we move to neutral from sell.