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
Overview
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: http://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
Projects
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.
Outlook
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.
