What happened
Shares of First Majestic Silver (AG +2.67%) fell 12.9% in the month of July, according to data provided by S&P Global Market Intelligence, even though the miner announced strong preliminary numbers for its second quarter and upgraded its full-year guidance. But that wasn't enough to build investor confidence in the silver stock as concerns about its recent pricey acquisition continue to linger.
So what
First Majestic will release its second-quarter numbers on Aug. 16. Thanks to higher production from all three of its operating mines, silver production is expected to have climbed 13% year over year to 3.3 million ounces. And its gold production should be up 95% year over year due to the contribution by the Jerritt Canyon mine, which First Majestic acquired in April.
Image source: Getty Images.
Backed by Jerritt Canyon's addition and higher expected throughput at all its other mines, First Majestic upgraded its full-year production guidance as follows:
| Metric | Previous guidance for 2021 | Revised guidance for 2021 | Actual 2020 |
|---|---|---|---|
| Silver production (ounces) | 12.5 million to 13.9 million | 13 million to 13.8 million | 11.6 million |
| Gold production (ounces) | 100,000 to 112,000 | 181,000 to 194,000 | 100,081 |
| Silver equivalence ounces production | 20.6 million to 22.9 million | 25.7 million to 27.5 million | 20.4 million |
Data source: First Majestic Silver. Table by author.
That revised guidance looks impressive, but there's a problem: Alongside its production growth, First Majestic also expects costs to be significantly higher this year.
Specifically, First Majestic now expects 2021 all-in sustaining costs (AISC) to be between $17.86 to $18.63 per silver equivalence ounce (SEO) versus its previous guidance of $14.81 to $15.99. That would be a significant jump over its 2020 AISC of $13.92 per SEO, which was already 10% higher than 2019. During its second-quarter earnings conference call, management acknowledged costs at Jerritt Canyon are on the higher side, and it is trying to address it.
Moreover, First Majestic increased its capital expenditure forecast by 22% to $205.3 million for the year primarily because of Jerritt Canyon.
All these factors, along with a drop in silver prices, weighed down on shares in July.
Now what
First Majestic was always known as a silver mining company, so its decision to venture into gold with a costly acquisition hasn't gone down well with investors. Although the acquisition diversifies the company's reach beyond Mexico, the stock will likely remain out of favor with investors until management can bring down costs at Jerritt Canyon and unlock value from the acquisition.
