Shares of First Majestic Silver (AG 3.79%) slumped 15.9% last month, according to data provided by S&P Global Market Intelligence. The stock had a heady run-up between February and June before it reversed course. By far, August turned out to be its worst month so far this year.
The only big event last month was the silver miner's second-quarter earnings release on Aug. 13. You'd think First Majestic must've delivered disastrous numbers, but its revenue surged 27% year over year on the back of record silver equivalent production.
The last quarter was a significant one for First Majestic as it acquired Primero Mining for $187 million in May. With the acquisition, First Majestic bagged the prized San Dimas mine, a major gold and silver deposit in Mexico that is now its cornerstone asset, its largest and lowest-cost mine. Another angle to note is First Majestic's restructured streaming agreement with leading silver streaming company Wheaton Precious Metals (NYSE: WPM), which is expected to bring in considerable cash flows from San Dimas going forward.
For now, thanks to San Dimas' addition, First Majestic's silver-equivalent production jumped 32% sequentially to 5.1 million ounces in Q2, driving its revenue higher.
Yet, First Majestic shares tumbled soon after the earnings release as incremental revenue failed to flow to the company's bottom line. The miner incurred a net loss of $40 million, compared to net income of $1.4 million in the year-ago quarter. Two factors were to blame:
- Low production and significantly high costs at its Del Toro and La Encantada mines.
- An impairment charge of $31.7 million on its La Guitarra mine.
First Majestic's all-in sustaining cost (AISC) for the quarter came in high at $16.43 per ounce, among the highest in the industry. To put that in perspective, San Dimas' AISC was only $5.41 per ounce.
Put simply, San Dimas was a savior for First Majestic in what could otherwise have been a troubled quarter. The market, however, is worried whether First Majestic will be able to sustain and grow its margins given its high costs and the weakness in silver prices.
Aside from San Dimas' contribution, First Majestic expects higher silver grades from Del Toro and La Encantada to boost production further in coming quarters. Management also foresees AISC to improve to a range of $13.28 to $14.84 per payable ounce in the second half of the year. Liquidity isn't a concern, as the company ended the quarter with $109.2 million in cash and cash equivalents.
While First Majestic remains a high-cost silver mining company, the optionality value in San Dimas is big enough for investors interested in exposure to silver to keep the stock on their radar.