Dios Padre Put On Hold: Yesterday morning, First Majestic released the long awaited update on the
exploration and development project at its Dios Padre Project in Sonora State, Mexico. Drilling on the
project was not able to delineate the resources that were expected. In total, 17 holes were drilled in the
main mine area and four different geologic anomalies on the property were tested. The company has put
on hold plans to quickly build the project and get the mine into production in 2007.
In a note dated August 24, 2006, we outlined our concern about the delay of information from the Dios
Padre project and what impact we thought that might have on the company’s ability to build and permit the
project on time. At that time, we increased our discount rate on the project to 7.5% from 5% previously,
and pushed back the start-up of the mine. With today’s release, we can see our concerns were warranted;
however, we underestimated the difficulties with the project. In our last published net asset value for First
Majestic of C$4.96 per share, we had included $1.22 per share in our NAV for the Dios Padre project, at
this time we are going to remove the project from our valuation. First Majestic still sees potential at the
property, but given there is no clear plan for production and no demonstrable resource we are not
including any value.
Figure 1: NAV Breakdown
Asset $US C$/share
La Parrilla $88.1MM 1.51
First Silver (100%) $81.2MM 1.39
Encantada $33.2MM 0.57
Cash Warrants C$24.8MM 0.38
Cash From Financing C$20.0MM 0.30
Administration (exp.) ($17.8)MM (0.30)
Total NAV $4.09
64.6 MM shares
Source: Sprott Securities Inc
Encantada, A Delightful Acquisition: On August 31, 2006, First Majestic announced the settling of
terms on the acquisition of Desmin SA de CV a privately held Mexican mining company for $1.5MM in
cash and stock. Desmin’s primary asset is an exploitation contract with Industrias Penoles, which covers
the operation of the La Encantada silver mine. Desmin also has an agreement with Penoles to purchase
the mine, mill and 700 hectare surrounding land package outright for $3.25MM with Penoles.
The mine is currently producing 800,000 ounces of silver with by-product lead from oxide ore. The mill has
a total capacity of 800 tpd, but is only processing 250 tpd. Management believes the mine can be ramped
up to produce more silver more efficiently.
Despite being a producing operation we are placing a 7.5% discount rate on the mine, because the
acquisition has yet to close, First Majestic is completing due diligence on the project. It is a distressed sale
and a thorough search of potential liabilities and red flags that may be attached to the company is
warranted. Another concern is there is no recorded resource on this mine, the property has seen
production from different ore bodies since 1981.
We have given First Majestic credit for 1 MM ounces of production from the mine in 2007 and 1.65 MMoz
in 2008, at cash costs of $6.54/oz and $5.84/oz respectively. For our net asset value, we have assumed
the mine will stay in production for 10 years. Though we do not know about the fresh rock resource, there
are reports of very extensive high-grade tailings on the property that could likely be recovered if the mine
life is much shorter than we have estimated.First Silver Consolidated 100%: In other news, shareholders of the outstanding 37% of First Silver voted in favour of a combination with First Majestic giving the company 100% of the San Martin Mine. The
company reports that all shareholders elected to take First Majestic stock in favour of the cash offer, with
two deferred payments. We had anticipated the merger would be successful, however there was some
concern over the cash situation if shareholder decided to take cash over First Majestic shares, it appears
that risk has been removed from the story.
Dilution Risk, Incorporated Into Valuation: Given the sell-off in First Majestic shares after the Dios
Padre announcement and the company’s cash position, approximately $4MM, we have incorporated a
C$20MM financing at C$3.25/sh into our valuation, to give the company sufficient cash to complete
Encantada acquisition and refurbishments, and to pay for improvements required at San Martin. This
would require the issuance of 6.2 MM shares or 10.5% dilution.
Figure 2: Production Profile Mine By Mine (000 oz)
Mine 2006 2007 2008
La Parrilla 648 1,417 1,823
San Martin 1,100 2,750 3,500
Encantada 72 1,010 1,650
Total 1,820 5,177 6,972
Source: Sprott Securities Inc.
Target To C$6.50 From C$7.50, Recommendation To Speculative Buy: We continue to think First
Majestic offers good value to shareholders; however, with the risk surrounding the incompletion of the
Encantada acquisition and the risk of planning without defined resources (demonstrated in yesterday’s
release) we are adding the speculative risk modifier to our recommendation. We continue to use a 10x
multiple of 2007 cash flow to determine our target price. Cash flow nominally does not change
dramatically with the removal of Dios Padre and the inclusion of Encantada. However, the amount per
share comes down to C$0.65 per share because of the dilution at a diminished share price. So our target
comes down to $6.50 per share.
We maintain First Majestic’s aggressive growth strategy should catapult it into the upper tier of silver
producers, and create shareholder value as it grows. Given our current assumptions First Majestic will
reach Hecla’s level of production by 2008, and Hecla has a market capitalization of US$700MM.
Der Report stammt von Anfang September..
Quelle: Stockhouse Canada Bullboards, 29.9.2006 veröffentlicht von 4longyears
