First Majestic Silver Corp (AG 1.77%) recently reported first quarter earnings. Is First Majestic making good on its belt-tightening strategy?
The numbers
All-in sustaining costs for the first quarter were $18.71 per ounce, higher than First Majestic's 2014 forecast of $15.87 to $16.69 per ounce. First Majestic is anticipating that all-in sustaining costs will drop back to the guided range as its Del Toro and San Martin mines complete the ramp up of their renovations. First quarter net income was $6 million, or $0.05 per share, missing the Street's expectation of $0.06 per share and marking a 77% decrease from the same quarter last year. Revenue came in at $65.3 million, which was a modest decrease of 3% from the first quarter of 2013.
With little cash on the balance sheet, First Majestic has stated it will focus on cost cutting, maximizing cash flow, and building its treasury back up. Keith Neumeyer, CEO and President of First Majestic, stated, "After three years of aggressive capital spending to build and expand four of our silver operations, First Majestic is planning to take a short breather to focus on treasury growth and free cash flow." First Majestic had cash and cash equivalents of $41.5 million at the end of the first quarter, which it added to with the $30 million sale of a portion of its future lead production.
Growth through cash flow
At the recent European Gold Forum, Keith Neumeyer stated during his presentation that First Majestic plans to finance the next leg of growth from cash flow. First Majestic is anticipating that it will cost roughly $300 million to finance Plomosas and La Luz, which will be their next two producing mines. First Majestic estimates that the additional production from these two mines plus increased production at Del Toro will bring annual production up to its long term goal of 20 million ounces per year. Keith Neumeyer stated that First Majestic hasn't raised any money in the equity markets since 2009.
With First Majestic relying solely on cash flow to fund growth, it is hard to anticipate when it may be able to increase its treasury enough to fund the next leg of production growth. First Majestic is anticipating that it will hit the 20 million ounce per year mark sometime between 2017 and 2020, depending on the price of silver.
A more mature alternative
Pan American Silver (PAAS 0.62%) also recently reported first quarter earnings. All-in sustaining costs for the first quarter were $15.54 per ounce, which was a 20% decrease from the first quarter last year and was much lower than the $17 to $18 an ounce range that management had forecast for 2014.
While management did reaffirm their $17 to $18 guidance, first quarter costs leave room for the possibility that Pan American will be able to beat or come in at the low end of guidance. Revenue for the first quarter was $209.7 million, which was a 14% decrease from the first quarter last year as a result of lower silver prices. Pan American had cash and cash equivalents of $394.3 million at the end of the first quarter with long term debt of $40.3 million.
Pan American's board recently gave approval to maintain its dividend at $0.125 per share, which at the current stock price is a 3.75% yield, leading the silver industry. Speaking at the European Gold Forum, Michael Steinmann, Executive Vice President of Corporate Development and Exploration expressed that with Pan American hitting 27 million ounces of silver production, it would be difficult to substantially grow silver production. He did express that Pan American expected growth of about 10% for gold. Pan American did manage to increase silver production by 5% in the first quarter from the same quarter last year, and gold production was up 43% year on year.
Foolish bottom line
First Majestic seems to have a clear plan in the place for the future of the company. CEO, Keith Neumeyer remains unwavering in his commitment to fund the company's growth through cash flow. He has stated that First Majestic will not pursue growth through any further acquisition at this point and that they will remain a one-country company with all their mines and projects in Mexico. Investors looking for less of a growth play and more of a mature silver play might want to consider Pan American, which pays an industry-leading dividend.
