Monday,
September 20, 2004.
First Majestic is a small cap junior focused on silver, offering investors exposure both to existing production capacity, and blue sky exploration potential. With a targeted acquisition strategy aimed at controlling properties with the capacity for rapid development, the company has the objective to become a mid-tier silver producer. Operating in prolific silver belts in Central Mexico, First Majestic is well positioned to generate superior cash flow that will enable the company to aggressively explore their properties, and fund any additional acquisition opportunities that become available. I believe that the precious metals sector is only just beginning what will become a multi-year secular bull market, and that silver will outperform gold during the early phases. Investors who own quality juniors leveraged to silver production will benefit in a bull market climate as the market awards a higher premium on cash flow and increased asset values of the contained resources in their property holdings. I own shares of FR. – Mike Kachanovsky
The universe of primary silver producing companies is very small and often overlooked by the investment community. In recent years the above ground world inventories of silver bullion have been drawn down due to a supply imbalance unable to keep pace with increasing global demand. As most of the silver production comes as a by-product from operations targeting other metals, it is unlikely that supply will be rapidly increased to meet the growing demand for silver. Commodities analysts have been predicting a rise in the pricing of silver for many years, and many of the smaller silver producing companies have been forced out of business due to the low current prices. This situation has created an opportunity for newly capitalized junior mining companies to cheaply acquire silver properties and mines on what may be the eve of a period of rapidly rising silver prices.
First
Majestic Resources Corporation has been around for many years going back to the
late 1970s when it originally obtained a public exchange listing and began
operations as a resource exploration company.
The company experienced a number of changes of operations through its
history, culminating in 2003 when they entered into an agreement to acquire an
80% interest in the Niko silver property in Mexico and the company changed
course from a focus on exploration of mineral properties, towards becoming a
silver producer, with the acquisition in January 2004 of the La Parrilla Silver
Sine in Durango, Mexico, for a total consideration of $3 million USD in staged
payments. Shortly thereafter First
Majestic announced another acquisition, purchasing the Perseverancia Silver Mine
along with other formerly producing properties, in Zacatecas, Mexico.
In April of 2004 First Majestic closed a private placement equity
offering that raised a total of $11.6
million to provide funding for the mining operations and the ongoing development
and exploration of their properties.
The
company spent several months repairing and modernizing mill equipment at La
Parrilla and is now at the stage where regular shipments of silver concentrate
production from their mining operations are generating revenues.
Production is expected to increase rapidly as the tonnage capacity at La
Parrilla is improved, resulting in growing revenue and cash flow that is
critical for the growth of a junior producer.
The
Management team at First Majestic consists of individuals with extensive
experience in the discovery of mineral deposits, including the Chief Operating
Officer, Mr. Ramon Davila, who is considered to be one of the most knowledgeable
engineers in all of Mexico for the evaluation and development of precious metals
resources.
Office
Address: 1480 – 885 West
Georgia Street, Vancouver, BC, V6E 3V7
Telephone:
1-866-529-2807
Exchange
Listing Symbol (TSX-V):
FR
Website
Address: www.firstmajestic.com
Share
Structure:
Issued and outstanding:
21,321,725
Options:
1,230,000
Warrants:
5,875,000
Fully Diluted:
28,426,735
Market Capitalization: $32 Million CDN
The
flagship property for the company is the La Parrilla Silver Mine.
Located only five kilometers from a major highway, and well supplied with
electricity and water, the mine infrastructure has been upgraded to ensure
efficient, low cost operations for many years.
The mine was originally established in 1956, and produced a total of
6,000,000 ounces of silver during its history, with ore grades averaging 10
ounces per ton. First Majestic
expects to produce 1,000,000 ounces of silver in their first full year of
operation, with production costs of approximately $3 per ounce.
During the period of due diligence completed by First Majestic when the
property was acquired, an independent engineering firm audited the upper level
of the mine and confirmed an existing resource of 1 million ounces of silver
proven and 1 million inferred ounces. With
the expectation that the grades increase at depth, considerable potential
resources remain in the other 8 levels of the mine, and over the 280-hectare
property. The company expects to
produce approximately 2 million ounces of silver per year over a ten-year mine
life, once full capacity is achieved. Only
10% of the property has seen exploration activity so the company plans to
continue active exploration efforts during the life of the mine and any success
they achieve will further extend the operating life of the mine. The company is
working to increase the silver recovery at the mill through increased efficiency
of the leaching process. Mill
capacity runs about 200 tons per day, and the current business plan is to expand
this capacity to 500 tons per day by first quarter of 2005.
The mill can be further upgraded to handle 1000 tons per day, which will
be completed once additional reserves have been proven on the various mine
properties.
The
Perseverancia Property acquisition was actually the consolidation of several
adjacent continuous properties, hosting the past producing Perseverancia, La
Esmeralda, and Magistral mines. These
properties were operated on a small-scale basis that exploited the exceptional
grade ore deposits. This package
lies about 60 km from the milling infrastructure at La Parrilla, and hence the
ore can be shipped by truck, providing an economical alternative to the
construction of a new plant, or third party mill. As much of the success of a mining operation is dependant on
the ability to keep mill facilities running near capacity, the newly acquired
properties will enhance the economic potential of First Majestic’s silver
production. None of the properties
have been subject to thorough, modern exploration techniques, and thus there
remains considerable potential that additional resources will be discovered.
The Perseverancia Mine in particular has several appealing mineralized
zones in the lands surrounding the existing mine, and the La Esmeralda and
Magistral Mines have both demonstrated the structural trends that would indicate
further higher-grade mineralization extends at depth in their deposits.
As part of the terms of the acquisition agreement, First Majestic must
incur exploration expenditures on these properties before the end of 2004.
The
Niko Silver Property is a JV deal that allows First Majestic to earn in to a 70%
interest by funding $900,000 in exploration activity over a 3-year period, with
a further 10% interest awarded if carried to a bankable feasibility study.
The property lies between two prolific mineral deposits within a 20 km
radius, that have yielded very high-grade silver-lead-zinc mineralization in a
similar geologic setting, with production values exceeding several billion
dollars. Extensive geophysical surveying has been completed on the
property to develop targets for a drilling program that commenced in June 2004.
While this property must be designated as an early-stage exploration
effort, there are several zones that host the potential for extensive
silver-lead deposits, as well as possible Carlin style limestone deposits
containing finely disseminated gold, and even platinum.
Of these, the Estrella Pipe is considered the most promising, and a large
vein system is believed to exist in the surrounding area.
The current exploration program has targeted these zones, and assay
results are pending. With the
extensive known deposits in nearby properties, and the promising data reported
through sampling and surveying work to date, the Niko Property certainly offers
blue-sky potential for a major new discovery.
A
final property, the Platino Porphyry Project, is controlled by First Majestic in
Chubut Province, Argentina. Early
indications support the potential that a large porphyry system within the
property may contain copper and base metals deposits.
This property is certainly outside of the current focus for operations in
Mexico, and is further disadvantaged in that Chubut Province has instituted a
ban on open-pit mining activity. While
surface and remote surveying activity is underway, at this time the property
must be considered a back-burner effort unlikely to generate meaningful results
in the near term.
The ultimate success for First Majestic in their efforts to establish themselves as a mid-tier silver producer remains to be seen, as it is still too early for reliable evaluation. The upgraded facilities at La Parrilla have allowed for higher capacity and increased efficiency, which should result in lower cost production. Securing the nearby Perseverancia, La Esmeralda, and Magistral Mines, in addition to surrounding properties, should help to ensure that adequate feedstock is available for the mill, as well as providing the potential for new high-grade ore body discoveries. Strictly considering the production metrics, if FR can achieve their stated objective of 1,000,000 ounces of silver in the first year of production at a cash cost of $3 per ounce, they will deliver cash flow in excess of $3 million USD, if silver commodity pricing holds above $6 per ounce. This will more than adequately fund the ongoing operational and exploration commitments going forward.
An
investor buying into First Majestic must have the confidence that silver prices
are indeed headed for sustainable higher levels. The company is well positioned to reap windfall profits from
operations as the value of silver rises. For
example if silver prices rise to $10 per ounce, FR could generate cash flow in
excess of $7 million USD. Or to put
it more bluntly, a 60% rise in the price of silver would generate a 133%
improvement in the cash flow. Episodes
of rising commodity pricing have also resulted in higher market values for
producing companies.
The
company also offers leverage to base metals like lead and zinc, which are also
enjoying stronger commodity price trends. Currently
First Majestic does not recover base metals in their operations but as they
continue to outline deposits with base metal content, the potential remains for
the installation of a floatation circuit that would generate production of base
metals and result in a credit against production costs for the processing of
silver ore.
On
the issue of asset values, First Majestic is also very likely to see significant
growth in contained resources of their properties, as further exploration
uncovers new deposits. Each of the
properties controlled by the company have seen only limited exploration to date,
and the Niko Property is adjacent to large mines bearing similar geologic
features. As a point of caution,
the property is large and there is evidence of several complex mineral systems
that potentially occur within the limits controlled by the company.
As such it may take several drilling programs before progress is achieved
to identify economic deposits. Nonetheless
the expectation for First Majestic to grow their resource base is justified.
Management
at First Majestic have indicated they continue to seek additional acquisition
targets to further increase their production capabilities.
They appear to have the expertise to not only negotiate excellent terms
for these transactions, but also to unlock value from the acquisitions by
rapidly taking them into production and increasing the efficiency in the
operations. This is a good
combination for investors, and First Majestic could be a successful vehicle to
take advantage of the trend in Mexico for consolidation of smaller companies
into newly capitalized companies seeking to increase production and cash flow.
Like all junior precious metals companies, First Majestic is only
suitable for risk tolerant investors, however the high risks inherent in this
type of investment are certainly offset by the potential upside.
Disclaimer: I have made my research and opinions available to the public as a resource to provide investors and the public with basic information. My comments and opinions should not be interpreted as a recommendation or investment advice, which I am not qualified to provide. While I have made every effort to maintain accuracy in the information I provide, it is possible that there are some errors or omissions in my coverage and the accuracy cannot be guaranteed. It remains the responsibility of each individual investor to confirm if the subject of my analysis is appropriate for their investment objectives, and to conduct their own research and due diligence, and retain the services of a qualified advisor on to provide this service on their behalf. I accept no responsibility for the performance of the companies that I feature in my coverage. Junior mining and exploration companies are a risky market sector and investment in these companies can result in loss of capital. Past performance is no guarantee of future success. From time to time I may purchase stocks in the companies I feature in my reports, and I may sell some or all of my holdings. I will disclose personal ownership in those companies that I refer to at the time of my first coverage, or after follow up reports. I do not accept compensation from companies as payment to provide positive coverage or opinions