First Majestic Silver (AG), a silver stock that we very much like at InvestingHaven, lost 15% in on Monday August 13th after it published earnings of Q2 2018. That’s a big loss and it brings up the question whether this silver stock is a sell more than a buy. The answer, of course, requires taking several things into account, notably the disappointing elements in their latest earnings, the outlook of the company and the price of silver. All in all, we believe First Majestic Silver is a silver stock to buy after yesterday’s crash, this is why.
In July we wrote this piece: Is First Majestic Silver A Stock To Buy Now?. We identified the breakout of First Majestic, but also looked at the divergence between the silver miners sector (falling) and First Majestic (rising). This is what we said:
The only explanation that makes sense is that First Majestic Silver has been rising with a falling silver price because of speculation. Somewhere this month we should see an announcement on one of their projects. Maybe the market knows more or is anticipating an answer.
Given all this, we believe that First Majestic Silver is bought on speculation. Prices can certainly go higher, but given the speculative nature the question is whether it is justified to go long at this point from a risk management perspective. Likely not, unless its price breaks strongly above overhead resistance in which case it may be eyeing $17.
For now, we believe that First Majestic Silver is a great long term play, though the short term is unsure.
The short term indeed appeared to be unsure. First Majestic was not able to clear overhead resistance, after which it started falling. As silver’s price had a sell off on Monday August 13th, and one specific element in First Majestic’s Silver earnings was disappointing, it resulted in a mega crash of the stock price of First Majestic Silver.
First Majestic Silver: solid earnings except for a one-time write-down
From the earnings report published on August 13th 2018:
On May 10, 2018, the Company completed its acquisition of all of the issued and outstanding common shares of Primero Mining Corp. for a total consideration of $187.0 million in common shares of First Majestic. With the acquisition, First Majestic is integrating a large, world-class, silver and gold mine into its portfolio of operating mines. The San Dimas Silver/Gold Mine, becoming First Majestic’s seventh mine in Mexico, will result in significant growth in the Company’s production profile with an estimated doubling of silver equivalent ounces produced.
- Record silver equivalent production of 5.1 million ounces, a 32% increase compared to Q1 2018
- Silver production of 2.8 million ounces, a 27% increase compared to Q1 2018
- Revenues of $79.7 million, a 36% increase compared to Q1 2018
- Mine operating earnings of ($2.3) million
- Cash flow per share was $0.08 per share
- All-in sustaining costs were $16.43 per payable silver ounce, a 3% increase compared to Q1 2018
- Recorded an impairment charge due to placing the La Guitarra mine maintenance of $31.7 million, or $20.5 million net of tax
- Adjusted net loss of $11.8 million
- Invested $26.6 million on capital expenditures
- Ended the quarter with $109.2 million in cash and cash equivalents
- Number of diluted shares decreased from 181M to 173M against Q1 2018
“Due to the decision to place the La Guitarra mine on care and maintenance, the Company was required under International Financial Reporting Standards to take a one-time, non-cash write-down of $31.7 million ($20.5 million net of tax) resulting in a net loss of $40.0 million (loss per share of $0.22) compared to net earnings of $1.4 million (EPS of $0.01) in the second quarter of 2017. Other one-time expenses during the quarter were related to acquisition costs of Primero and financing costs associated with convertible debentures issued in the first quarter of 2018.”
Conclusion: solid growth, solid prospects, solid management, combined with a one-time write-down and other one-time expenses because of the Primero acquisition. Yes, the net loss was worse than expected, but what does this mean in the bigger scheme of things?
First Majestic Silver chart: stock to buy after the crash?
The chart of First Majestic Silver shows our point made above: overhead resistance rejected the recent rally at 8.50 USD. Its price started falling with silver’s accelerated decline in July, and crashed in a sell-off on August 13th to dip below 5.5 USD.
With this, there is a new pattern visible on the chart which is a channel that connects recent highs of 8.50 USD with 19 USD in the summer of 2016.
The most likely path now is that First Majestic Silver will continue to trade in the upper part of the falling channel, between the median line (dotted) and the upper line (full line, resistance). This assumes that the silver price sell off stabilizes going forward, and we believe that will be the case, read below why we believe so!
Silver price sell off close to a climax
The silver price is the important correlation here. We look at 2 key aspects of the silver price: the long term chart and the futures market.
The monthly chart outlined below shows this bullish trendline that started rising with the grand bull market in 2003. Note how this trendline comes in at 13.9 USD later this year. At the same time there is horizontal support around the 2015 lows, also 13.9 USD. We expect silver to be near a major bottom.
The 13.9 USD area will not necessarily be tested, but a potential scenario is that a higher low compared to 2015 will be set in the coming weeks.
Our belief of a higher low come from the silver market. We explained recently how we read the futures market COT report, see Gold Market Writing History In 2018 and Gold Futures Market At Extremes, Suggests Gold Price Bottom Set For 2018.
Silver is also writing history with extreme futures market positions. Note how each previous instance of similar readings got followed by a powerful short to medium term rally, see red circles on the chart.
The silver price and silver COT report suggest a major bottom is being set, which underpins a great long term outlook for First Majestic Silver. We believe this silver stock is a buy at current levels, certainly not a sell!
