First Majestic Silver Corp. (AG) Earnings Call Transcript & Summary

Thank you for standing by. This is the conference operator. Welcome to the First Majestic Silver 2024 Production Financial Results and 2025 Guidance Conference Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Mr. Keith Neumeyer, President and Chief Executive Officer of First Majestic Silver. Keith, please go ahead.

Well, thank you, and welcome to everyone joining our call today to discuss the Q4 and year-end results and, of course, guidance as well, which is put out recently. Before I get into our discussion, I'm just going to pass the call over to Samir Patel, our General Counsel, who will read our disclaimer.

Thanks, Keith. Before we begin today's call, I would like to remind you that we will be referring to certain non-IFRS measures and making certain statements regarding First Majestic Silver and its operations that constitute forward-looking statements in accordance to applicable Canadian and U.S. securities laws. All statements that are not historical facts, such as statements regarding future estimates and plans or expectations of future performance constitute forward-looking statements that reflect the company's current views with respect to future events. These statements are necessarily based upon a number of assumptions and estimates that, while considered reasonable by the company, are inherently subject to significant business, economic, competitive, political and social uncertainties and contingencies. We encourage you to refer to the cautionary language included in our news release that was disseminated earlier this morning and the disclosure on non-IFRS measures in our most recently filed management discussion analysis, as well as the risk factors set after in our most recently filed annual information form. As a reminder, these documents, along with all of our continuous disclosure documents are available under the company's profile on both SEDAR+ and on EDGAR. Investors are cautioned against distributing undue certainty or reliance on any forward-looking statements made during today's call. And the company does not attempt or assume any obligation to update these forward-looking statements or information, other than as required by law. With that, I will turn the call back to Keith.

Thanks, Samir. In addition to Samir and myself, Keith Neumeyer, CEO and Founder, on the phone today, we have Mani Alkhafaji, who is our VP, Corporate Development; Steve Holmes, our Chief Operating Officer. We also have Darrell Rae and Joel Faltinsky -- sorry, Joel, online as well who run IR. So just getting into the quarter, nice to see the stock up today. For those out there, we've been monitoring the shares. Obviously, we created quite a liquidity event for Gatos' shareholders. They went from a very illiquid stock to obviously quite a liquid vehicle that trades tens of millions of shares a day. And I think it's created a situation where some investors have decided to pare down their positions. Unfortunately, and it's put some undue pressure on First Majestic's stock and that has created our underperformance over the last couple of weeks since closing. It does take time to get through that. And I think the news release site today or news release in the future when we get actually one number out, which will be pretty fantastic, including the Gatos transaction, and Q2 will be a full quarter of all mines producing. It will be pretty interesting in 2025 as the year evolves. But just focusing on the news release and then in Q4 in 2024, we had record cash flow in Q4. I'm not going to go through -- usually, I read it all out to you for -- $68 million and in our cash flow, pretty significant, amazing safety record, all-time low reportable loss incidents. We met our 2024 guidance, 21.7 million ounces of silver equivalent production. And always the same cost at $21.11. We had record production in Santa Elena for the first time ever, breaking through 10 million ounces of production, which is really nice to see. It got closed in 2023, but in 2024, it actually broke through 10 million ounces, which is obviously a pretty good situation. We ended the year with a very, very strong cash balance of $308 million and then $364 million in liquidity. That does not include Gatos by the way. This is -- for those out there, if you're wondering, that number will be released, obviously, as a result of our end of Q1, but we're in a very, very strong cash position and a very strong balance sheet, which is very nice to see. Cash costs were down by 8% compared to Q1 versus Q4. Share buyback program has been in place. In the news release, we did show that we bought back 50,000 shares. But that was only basically just in December. That share buyback program's continued through January and into February, and we expect to continue that program. These share prices has been ridiculous in our opinion, any way. So we'll continue that program. We have the Navidad announcement and the San Dimas announcements that have come out over the last few months regarding our exploration programs, both of those operations, Navidad being at Santa Elena, for those who don't know, but discoveries continue at Santa Elena, which is always a pretty nice situation. And we look at Los Gatos, it was almost a look like asset; Los Gatos being 103,000 hectares in size and Santa Elena being 102,000 hectares in size. And these are 2 very large chunky land packages, et cetera, that have exploration upside that is hard to measure if it's -- both of these operations have mine lives currently of close to 10 years, and it's a nice place to be to have 3 assets, including San Dimas that have long mine lives and we don't have to be concerned about -- oh well, we're miners so we're always consider on mining more ounces, but it's nice to have 3 solid assets in our portfolio. The mint has done well. We have a great Q4 at the mint, as you can see in the news release today. Over $9 million in revenue from the mint, all those are profitable ounces, which is a fun and neat part of our business and something that is growing and something that we're looking to extend going forward. Our production increase, we put our guidance out, so you can see in our guidance that we're guiding around $29 million, that's the midpoint for 2025 or so equivalent. And about 53% of that is silver, about 30-some-odd percent is gold and the rest is in the form of lead and zinc. And the costs are looking to improve as well. We've got a very, very large exploration program planned for 2025. We got close to our target in 2024. I think we had a plan of doing about 220,000 meters in 2024. We got about 180,000 completed, which is nice. We'll be updating our AIS in March, which will show the changes in resources, which we look forward to seeing. But in 2025, we're actually planning to drill about 270,000 meters of drilling. It's a pretty darn big program. And then, of course, a big focus for the next several months is integrating Gatos. So we went from 4,100 employees to 5,300 employees. There are a lot of similarities in what we do, but there's also some differences. And these synergies or this whole merger, it does take time. Different technologies have to merge together and it does take time. There's cost effectiveness, and that will occur as well in a variety of different departments. And so we're looking to take advantage of some of the synergies to bring our cost down throughout the business, and we're looking forward to working on that over the next couple of quarters and there's plan in place to do exactly that thing. So look forward to good news going forward on the Gatos acquisition. And that's really it for me. So why don't we go to questions, if there are any.

[Operator Instructions] And your first question today will come from Heiko Ihle with H.C. Wainwright.

It's nice to see the stock a little bit green today. It's good to see. Looking back at the cost guidance that was published last week, you've got property plant and equipment, sustaining capital at $51 million. The peso is obviously at 20.4 as of this morning when I wrote this up. That got me thinking, what kind of long-term exchange rate, even past 2025 an inflation factor is spent on all of this? And more generally, what are you seeing with pricing for equipment down in Mexico? And maybe building on all of that, what are you seeing in regards to inflation in general?

Well, thanks, Heiko, and nice hearing from you and thanks for having the question for us. I'm going to pass that question on to Steve.

Okay. Thanks, Keith. So right now, our guidance for next year, we're using a 19.5:1 ratio on the peso, so we're in good shape there. As far as inflation factors, what we're seeing is about a 4% to 4.5% general inflation rate. And we worked pretty hard on our programs to offset that inflation rate and the impact of the peso from last year. So we don't anticipate seeing any unusual inflation that might come from, say, government policy applications north of the border and those types of things. But that's the basis for our guidance.

Fair enough. And then a completely different question. Can you provide some color on your longer-term margin expectations for the first mint? I mean I assume it to scale reasonably well because at some point, all the equipment is there and you're putting in silver at x and selling it at whatever, 1.5 times x. I mean, can you maybe just provide some color on what you think you'll see maybe later this year and next, even if you thought that far ahead?

Well, regarding the mint, capital is still being spent up until really September, October of 2024. So we were still purchasing machines and I wouldn't say it was really up and running until really September and October. We had an inaugural celebration where everyone showed up and officially cut the ribbon and so on in September. So it has been operating since March. And we've just -- we've been hiring people, putting the right people in place and it's going -- it's a young business. The business is actually -- it kind of only reached its 1 year anniversary next month. It's hard to expect to see major profits in such new business. But it is doing quite well. where our ounces are generally being sold for about $3 over spot. So we do have a cost of those ounces. We have to get them out. It's our ounces coming from San Dimas that go through [ Sahi ] for refining, which has a small cost there. And then of those 1,000 ounce commercial bars get [ almond cart ] up to Las Vegas into the mint, where it gets converted into a variety of different products and sold into the marketplace between $3 to $5 cost above spot, depending on the different -- some products are produced with limited quantities, like the Trump bar is only -- I think we only produced 2,400 of them. The 1776 model, we only produced 1,776 of them. So those types of special runs, we charge $5 over spot, and they sell quite well. So the Lunar series, the Snake just came out, the Dragon came out a couple of months ago a little bit late in the year, we worked on after quite some time, unfortunately, but it finally came out. And there's no limited run on that, and we'll just keep making them as they sell but it's doing quite well. Buffalo has come along quite nicely as well. And there's a couple of other products. So there are 3 additional products that will be released in 2025. We got about I think about 5% of our total overall production through the mint in 2024, showing -- with those types of margins. Our goal in 2025 is to get 10% of our total production through the mint, and we hope to continue to grow that year after year.

Fair enough. Yes, I was on the website earlier today, and they do a great job displaying the Freedom Bar and the 20th anniversary runs being almost sold out, so that's pretty cool.

Your next question today comes from [ Charles Ottoman ] with Scotiabank.

I'm just asking on behalf of Ovais. My first question would be, how should we weight production on CapEx within the first half and second half of the year? Are you expecting it to be flattish before the closing of the Gatos acquisition? I know that's supposed to impact some production at CLG but bond beyond that, should we expect like a flattish production for this year?

I had a hard time understanding the question. Mani, do you want to jump on that one?

Yes. Chris, maybe just -- or sorry, Charles, repeat the question, if you don't mind? We didn't hear it clearly.

Okay. Sure. I'm asking, how do you expect production and CapEx to shake out in the first half and the second half of the year? Would it be flat? Or are you expecting higher on the second half or first half?

Yes. So it will be relatively consistent, so H1 versus H2. Gatos is coming in early enough in the year, Jan 16 . So we don't have a lot of a lot of delays integrating it. So it's going to be relatively consistent. Just generally, in Q4, our exploration program has vested well, so you'll probably see a bit of a drop off and Q4 from exploration program. But for the most part, it's relatively consistent Q-over-Q.

Okay. And just sticking with exploration here. Could you explain -- could you provide some details around what type of exploration work is being done at Jerritt Canyon?

Yes. So we have 18,000 meter program at Jerritt's. It's really going to go back and target some of the targets that we were hoping to get in 2024, but we were able to just do the delays in permits and the performance of the contractor. So we're getting ahead of that getting set up just in time to really kick it off right on time. It's got to be -- it's really greenfield exploration targeting areas that hasn't been explored before. We have received the permits at the end of 2023, but really haven't an area that hasn't been explored. So that's going to be the focus in 2025 is go back and test those targets.

Okay. And just on free cash flow. I mean, it's good to see the company generally had about record free cash flow in Q4. And I think just based on our estimates and what the current spot price is saying, we should expect this to continue. So how should we think about your capital allocation priorities? I mean moving forward basis?

I'll defer to Keith on the capital allocation. I know there's a lot of discussions internally, but we just thought -- our focus is obviously to strengthen the balance sheet, but I'll turn it to Keith on that one.

Yes. We put our budget out already on our expected capital expenditures for 2025, and I don't expect that's going to change. I think we are exploration program is already pretty aggressive. Our development program is also pretty aggressive. I'd really like to see treasury growth. And any extra capital that we that we're going to be gaining throughout the year. I want to see to go into the treasury. And if we end the year with $500 million in cash in the treasury, I think that's a pretty good place to be. I can see that happening.

Your next question today will come from Don DeMarco with National Bank.

Keith, congratulations to a strong quarter, positive free cash flow. And that gap in proposition on price of silver is higher, notably higher since the deal. So the outlook for silver remains bullish. When you look at the remaining single asset silver names out there, what are your strategies at this point with regard to M&A?

Well, you guys are pretty close to the market. And thanks for your systems throughout the process as well. And we know all the players. We just had our Board meeting, our quarterly Board meeting just over the last couple of days. We've got a list of companies that we follow, and our due diligence team is made up of a handful of people that just follow the space, and we gobble up all the news that different companies put out and we absorb it all and put it all in Excel worksheets and we analyze everything and we categorize everything and a rate everything. And -- but look, we just bought Gatos, right? There's the largest transaction over the history of the company. They're basically a $1 billion transaction it's going to take a couple of quarters to get it fully integrated into the business. There's a lot of work to do there. So I'd rather our teams and some of the integration team is some of the same team is doing the funding some of the M&A team partners some of the same team is in the integration. So I'd rather our team focused on integration right now than worrying about other M&A. But there are names out there, and we've always got our eyes open, but it takes to the tangle. We're not in any rush to do another deal tomorrow.

Okay. Good luck with Q1.

Your next question today will come from [ Chris Ewing ], private investor.

Congratulations on your good work here in your purchase of Gatos. So I was just wondering what silver price do you think that we will need until we get positive per share earnings. And a follow-up question would you ever consider in the future, maybe when we get in a good place with these different assets integrated in the First Majestic maybe looking at dividends for shareholders in the future?

Well, the company already pays dividend. You should know that we do that. It was announced in today's news release that the Board approved the dividend payment that dividend has been paid, I think, for over 2 years. I actually forget when we actually started it. When it comes to earnings, there's so much noise about earnings. Like we put out EBITDA. We put out our cash flow. We put out our mine operating earnings. All those numbers are positive. When it comes to bottom line earnings, when you actually see on the bottom line, a negative number, unfortunately, there's just so much stuff that goes into that. And the biggest issue for us is the currency fluctuations. We have -- under IFRS, we have to carry this very, very large tax liability and it's in Mexican pesos. And every single quarter, the Mexican peso moves around, and it can change the bottom line earnings number by significant amounts. And it is a little bit crazy. It's hard for investors to understand that. They look at it as a loss, but it's a movement in the value of the assets that are on our balance sheet. So we have something in the order of USD 150 million worth of peso sitting on our books, and those pesos are used to run the business. And because we report in U.S. dollars, those pesos move around, and then it creates a loss or a gain. And it can be quite different from one quarter to another. And it does create a ton of infusion. The Audit Committee has this discussion with our auditors who are Deloitte on a regular basis on what we can do about this. So there's really nothing we can do. It is just a fact of running a foreign business in Mexico, which is a volatile currency, and reporting in U.S. dollars. And it's just a lot of our money, half of the money is U.S. dollar type, our mining is in pesos. Well, we got Canadian dollars, of course, we got euros, of course, as well. But nevertheless, it's the pace that really drives this profit and loss number. And I'm not sure, Mani, if you want to jump in and comment any further.

No, that's pretty much it. It's really the tax losses pool that creates basically what's called a deferred income tax on our balance sheet, and that gets revalued every quarter. So when the peso weakens, it's great for us because it reduces our cost, so we'll start seeing our cash cost all-in sustaining and all that coming down. But the flip side is the balance sheet gets revalued and it triggers a noncash foreign exchange loss, and that ends up hitting the P&L, unfortunately, in this case, but it's a negative. But to your earlier point, what silver prices needed for positive earnings, I do think we're -- this trend continues with Gatos coming in we'll have no problem really showing continuous improvement quarter-over-quarter, and yes, be on the lookout for Q1 and Q2.

[Operator Instructions] I will now pass the floor over to Mr. Darrell Rae, Investor Relations at First Majestic Silver to take us through the questions that have been submitted today through the webcast.

Thanks, Nick. So we have a couple, Keith, and to wrap up, and we'll get more questions from the line, if there are any, but we might wrap with these. So Keith what are your insights on how the current political landscape in Mexico might influence First Majestic Silver's operations and market position?

Yes. I think going back a couple of years, I think we were pretty negative on what was going on in Mexico. The previous government was just really not helpful. A lot of headline news, a lot of rhetoric that was hitting the newspapers and very much just anti foreign investment, not so much mining per se. Mind you, you was talking about increasing taxes for miners and they did slow down the permitting process and thankful on this trust rated with many mining companies. And -- but it was just basically a great kind of totalitarian and kind of anti-business type environment in Mexico for the last 5 years, which is quite unusual because when we put the company together, 21 years ago, Mexico is a pretty friendly place to be as a Canadian company. And we were able to build the business quite quickly just because of the regulatory environment in Mexico over that 15-year period and until this new government came in. So now 21 years in, we've got a new government, Sheinbaum, Claudia Sheinbaum, she seems to be pretty open much more pragmatic, much more business-orientated saying a lot of the right things. It's only been a couple of months so it's hard to really point out any major events that are positive events that could be affecting the mining sector. But I can tell the people who are listening today that there are permits that are being granted. Several mining companies have received permits over the last month for a variety of different projects, and we're in line for a couple of permits as well, which are being told in getting as well. So the environment looks like it's changed a lot. So we're crossing our fingers that what we're hearing and what we're thinking is actually real and this current Mexican government has opened for business and open to foreign investment. And we did make a decision to buy Gatos for a reason. We're we've got 4 producing mines in Mexico, and then we've got 5,300 employees in the country. We've got a big stake in the country. And obviously, if we weren't as positive we are about what the future is for Mexico, I don't think we have done a Gatos transaction.

Thanks, Keith. There's one more question here. We're getting a few, but I'll put them all together. But one is, your general thoughts with gold hitting all-time highs, will silver catch up in time we could talk about this forever, Keith, but a little bit of outlook on the silver price and what might happen in the medium term?

Yes. Well, I get criticized constantly for my triple-digit silver call. So even recently, I just saw some throw some mud my way. But yes, it's -- look, I'm a big supply-demand fundamentalist and I think that supply/demand for silver is at a point where we're in multiple year deficits, and there's no reason why silver prices should not go higher. It's just a matter of time and -- there's obviously a lot of -- there's a huge paper derivative market that kind of drives the price, which drives me crazy and drives a lot of other silver bulls crazy as well. These are the biggest banks in the world who have huge paper contracts in place that seem to be in the way of allowing silver to move to the prices should be at. And not that I don't like 3 silver, it's not a bad place to be. If you look at our lifetime, Silver has only been over $30, 3x in my life, and they spent over $30 for a good part of 2024 and is holding ground quite nicely, and gold continue seems to continue to want to drive higher. So it's just -- silver will break out. And when it does, it's going to rattle these banks. I'm sure we have the seed paper contracts, but that's just the way the market works. And once we get through this $35, $38 range, I think are the 2 biggest resistent levels. It will slice through $40 and through $50 pretty quickly and I think it's going to be honestly triple digits. And is it going to happen in 2025? Well, I don't have a crystal ball, but it's something we're going to see, and I don't think it's that far away.

Okay. That was the final question from the webcast. Back to you, Nick.

Showing no further audio questions, this will conclude our question-and-answer session. I would like to turn the conference back over to Keith for any closing remarks.

Well, thank you, everyone, for joining us today. And obviously, this has been recorded and will be available on the website if anyone wants to have a listen to it later in their free time. But for those who are online, thanks a lot for joining us today. If there are any further questions or comments, please contact any of our staff, you all probably know Mani or Darrell or Joel, just any 3 of them are always available to chat with. So -- and we'll see the PDAC for those of you calling from Toronto. Have a great day.

This will conclude today's conference call. You may now disconnect your lines. Thank you for participating, and have a pleasant day.