First Majestic Silver Corp. has released the unaudited interim consolidated financial results for the company for the third quarter ending Sept. 30, 2013. The full version of the financial statements and the management discussion and analysis can be viewed on the company’s website or on SEDAR and on EDGAR.
2013 third quarter highlights
- Silver equivalent ounces produced increased by 38 per cent to 3,370,457 ounces compared with 2,438,085 ounces in third quarter 2012.
- Silver ounces produced increased by 22 per cent to 2,689,237 ounces compared with 2,205,237 ounces in third quarter 2012.
- Net earnings after taxes amounted to $16.3-million or a basic 14 cents in earnings per share.
- Adjusted earnings per share (non-GAAP (generally accepted accounting principles)) were 22 cents after excluding non-cash and non-recurring items.
- Cash flow per share (non-GAAP) was 32 cents, representing a 2-per-cent increase from third quarter 2012.
- The company generated revenues of $76.9-million, a 21-per-cent increase compared with third quarter 2012 primarily due to an increase in silver equivalent ounces sold.
- Mine operating earnings amounted to $29.2-million, a decrease of 19 per cent from third quarter 2012, primarily due to a 29-per-cent decrease in the average realized silver price per ounce.
- Total cash cost in the third quarter, net of byproduct credits, was $8.84 per ounce, down 6 per cent from $9.43 compared to second quarter 2013 and down 4 per cent compared with third quarter 2012.
- Average realized silver price per ounce was $21.58, a decrease of 29 per cent compared with third quarter 2012.
- At the end of the quarter, cash and cash equivalents were $67.5-million and working capital was $69.6-million.
Keith Neumeyer, chief executive officer and president of First Majestic, stated: “Management’s focus for this quarter has been on cost reductions and capital program reductions. This initiative, which began in April has resulted in two back-to-back quarters of total cash cost reductions. In addition, costs at the corporate level have also declined 11 per cent compared to the previous quarter. As we can’t count on an improved environment in the short term for silver prices, management has little choice other than to cut further. Our focus for 2014 will be to optimize operations, to continually reduce costs and remove all discretionary investments that don’t have major impacts on future guidance. As a result, we expect to see continued improvements in our cost structures over the coming quarters.”
2013 THIRD QUARTER HIGHLIGHTS Third quarter Third quarter Second quarter Year to date Year to date 2013 2012 2013 2013 2012 Operating Silver equivalent ounces produced 3,370,457 2,438,085 3,268,117 9,370,366 6,547,526 Silver ounces produced (excluding equivalent ounces from byproducts) 2,689,237 2,205,237 2,767,966 7,894,867 5,949,288 Payable silver ounces produced 2,609,903 2,127,056 2,689,222 7,523,944 5,781,348 Total cash costs per ounce $8.84 $9.19 $9.43 $9.23 $9.02 Total production cost per tonne $43.49 $30.05 $39.57 $38.17 $28.77 Average realized silver price per ounce ($/equivalent oz) $21.58 $30.48 $22.19 $23.98 $30.59 Financial Revenues ($ millions) $76.9 $63.6 $48.4 $192.3 $176.2 Mine operating Earnings ($ millions) $29.2 $35.8 $14.3 $78.1 $102.6 Net earnings ($ millions) $16.3 $24.9 $0.2 $43.0 $66.5 Operating cash flows before movements in working capital and income taxes ($ millions) $37.2 $35.9 $34.8 $116.9 $103.6 Cash and cash equivalents ($ millions) $67.5 $72.8 $78.9 $67.5 $72.8 Working capital ($ millions) $69.6 $84.0 $80.4 $69.6 $84.0 Shareholder earnings per share (EPS) -- basic $0.14 $0.22 $0.00 $0.37 $0.61 Cash flow per share $0.32 $0.31 $0.30 $1.00 $0.95
Net earnings for the third quarter of 2013 were $16.3-million (EPS of 14 cents), compared to net earnings of $200,000 (EPS of nil) in the second quarter of 2013 and compared with net earnings of $24.9-million (EPS of 22 cents) in the third quarter of 2012. Net earnings in the third quarter include the sales of approximately 650,000 ounces of silver that were held in inventories at the end of the second quarter.
Adjusted EPS (a non-GAAP measure) for the third quarter of 2013 was 22 cents, after excluding non-cash and non-recurring items, such as deferred income taxes, share-based payments, writedown on marketable securities, gains from investment in silver futures and fair value adjustment of the prepayment facility.
The company generated revenues of $76.9-million for the third quarter of 2013, an increase of 59 per cent compared to the second quarter of 2013. Higher revenues were primarily due to an increase in payable equivalent silver ounces sold, which included suspended sales from the second quarter that were sold in the third quarter. This was partially offset by a 3-per-cent decrease in average realized silver price per ounce in the quarter. Compared with the third quarter of 2012, revenues increased by 21 per cent due to a 75-per-cent increase in silver equivalent ounces sold, offset by a 29-per-cent decrease in average realized price per ounce.
The company recognized mine operating earnings of $29.2-million compared to $14.3-million in the previous quarter and compared with $35.8-million in the third quarter of 2012. The increase in mine operating earnings compared to the second quarter of 2013 was attributed to the sale of the finished goods inventories that were built up at the end of the second quarter, and a 3-per-cent increase in production, but offset by higher depletion, depreciation and amortization related to the increased production rates and the addition of plant, equipment and mineral properties related to San Martin and Del Toro mines.
Cash flows from operations before movements in working capital and income taxes (an additional GAAP measure) in the third quarter of 2013 increased by 7 per cent to $37.2-million (32 cents per share) compared to $34.8-million (30 cents per share) in the second quarter of 2013, and increased by 4 per cent compared with $35.9-million (31 cents per share) in the third quarter of 2012. The increase in cash flows from operations compared to the previous quarter was attributed to higher gross margin as a result of the second quarters suspended sales of approximately 700,000 ounces of silver, 650,000 ounces of which were sold in the third quarter and higher mine operating earnings.
Mexico tax reform
On Sept. 8, 2013, the executive branch of the Mexican government presented its 2014 tax reform bill to Congress with a proposed effective date of Jan. 1, 2014. On Oct. 18, 2013, the Chamber of Deputies (Lower House of Congress) approved the bill with certain amendments. On Oct. 29, 2013, the tax commission of the Senate (Upper House of Congress) approved the tax reform bill and on Oct. 31, 2013, the Mexican Congress approved the 2014 Mexican tax reform package. The reforms will be published in the Mexican Official Gazette and will have legal force in January, 2014.
There are a number of significant changes in the Mexican tax reform package that will impact the company effective Jan. 1, 2014. Specifically, a 7.5-per-cent royalty calculated based on earnings before interest, taxes, depreciation and amortization will be imposed. In addition, a 0.5-per-cent additional royalty calculated based on revenues will be levied. Further, the planned corporate tax rate reductions to 29 per cent in 2014 and 28 per cent thereafter have been repealed and the corporate tax rate will remain at 30 per cent. In addition, a 10-per-cent withholding tax on dividend distributions has been introduced but will not supercede treaty rates. These Mexican tax reform changes to the federal tax code are significant and, are expected to increase the company’s tax burden in Mexico and significantly impact management’s capital investment decisions going forward. The company is in the process of evaluating and quantifying this impact and will make further announcements in its 2014 outlook scheduled for release in early January.
Silver equivalent production in the third quarter increased to a record 3,370,457 ounces, an increase of 3 per cent compared to 3,268,117 ounces in the previous quarter. The new Del Toro silver mine contributed 567,723 ounces of production in the third quarter, an increase of 14 per cent compared to 499,357 ounces in the previous quarter. Compared with the same quarter of the prior year, silver equivalent production increased by 38 per cent primarily attributed to additional production from Del Toro, improved head grade and tonnage milled at La Parrilla and San Martin, and the plant expansion at La Guitarra from 350 tonnes per day (tpd) to the current 500 tpd.
The overall average head grade for the third quarter of 2013 was 202 grams per tonne (g/t), a 21-per-cent increase compared with 167 g/t in the third quarter of 2012 and 1 per cent increase compared to 201 g/t in the second quarter of 2013. The increase from the same quarter of the prior year was primarily attributed to 33-per-cent increase in head grades from La Encantada due to a higher proportion of fresh ore being processed, 23 per cent higher grades from San Martin as the mine began extracting ore from the Rosario mine during the quarter, 12 per cent higher grades from La Parrilla, offset by 40 per cent lower head grade from the La Guitarra mine as production ore came from areas within the La Guitarra vein which contained higher gold grades in conjunction with lower silver grades.
Total ore processed during the third quarter amounted to 641,345 tonnes milled, representing a slight decrease of 4 per cent over the previous quarter due to the effects of two major hurricanes which struck Mexico during the quarter combined with a breakdown of the third ball mill at the La Encantada mine, which has since been repaired.
Cash costs per ounce in the third quarter were $8.84, a decrease of 6 per cent from $9.43 in the previous quarter and a decrease of 4 per cent compared with $9.19 in the third quarter of 2012. The decrease in cash cost compared with the same quarter of the prior year was primarily attributed to an increase in byproduct credits. Byproduct credits increased due to the additional production from the new Del Toro flotation plant, an increase in lead and zinc production from the La Parrilla flotation plant, as well as higher gold production from the La Guitarra and San Martin mines.
Production cost was $43.49 per tonne in the third quarter, an increase of 10 per cent from $39.57 in the previous quarter. Compared with the third quarter of 2012, production cost per tonne increased from $30.05, or 45 per cent, primarily due to higher production costs per tonne at the Del Toro mine and the proportional increase of fresh mine ore being mined versus old tailings at the La Encantada mine.
La Parrilla silver mine
Total production at the La Parrilla mine was 1,208,635 equivalent ounces of silver in the third quarter of 2013, which was an increase of 27 per cent compared to 952,819 equivalent ounces in the second quarter of 2013 due to an increase in grade and recoveries of lead and zinc, and an increase of 42 per cent compared with the third quarter of 2012, due to a 12-per-cent increase in head grades and 8-per-cent increase in tonnage processed.
Cash costs per ounce decreased by 29 per cent from $9.20 in the second quarter to $6.54 in the third quarter. The decrease is cash cost was a result of higher silver grades, improved recoveries and an increase in byproduct production.
The company continued a reduced pace of construction for the extensive underground ore haulage at level 11. The new San Jose production shaft has proceeded to 25 metres below the surface from the head of the shaft with a cost of $400,000 in the third quarter. Also, a total of $500,000 was spent on underground level 11 with 286 metres developed during the quarter. This new haulage and underground electric rail system will consist of 5,000 metres of development and a 260-vertical-metre shaft replacing the current less efficient above ground system of trucking ore to the mill. Once completed, this investment is expected to improve ore logistics, ultimately reducing overall operating costs and thereby delivering operational efficiencies.
Del Toro silver mine
Phase 2 construction of the Del Toro silver mine, which includes the addition of a 1,000 tpd cyanidation circuit, is now completed and commissioning began on Oct. 20, bringing the total production capacity to 2,000 tpd. The first production of silver dore bars is planned for Nov. 20, 2013.
Total production at Del Toro was 567,723 equivalent ounces of silver in the third quarter, which was an increase of 14 per cent compared to 499,357 equivalent ounces in the second quarter of 2013. Mill throughput during the third quarter, calculated based on 73 actual operating days instead of the planned 84 days due to delays from cyanidation construction interference, was 1,061 tpd with head grades of 244 g/t silver, 4.3 per cent lead and 2.8 per cent zinc compared to 216 g/t silver, 3.4 per cent lead and 3.3 per cent zinc in the second quarter. Silver recoveries averaged 69 per cent during the third quarter compared to 72 per cent in the previous quarter due to a variation in the ore feed from a transition zone between oxides and sulphides. Further testing is under way at the company’s central lab with the objective of improving overall metallurgical recoveries; however, once the new cyanidation circuit is operational, some of these ores will be processed through this new circuit.
Cash cost per ounce for the third quarter was $9.29, an increase of $1.09 compared to $8.20 in the previous quarter. The increase in cash cost per ounce is primarily attributed to operating days lost due to the construction overlapping, heavy rainfalls in the area during the quarter, and some inefficiencies related to early-stage operations. Cash cost per ounce is expected to decline in the fourth quarter as operations get more routine and efficient and as ramping up of oxide production begins in the cyanidation processing plant.
To conserve capital in a reduced silver price environment, management is altering its capital investment and production plan for the Del Toro mine. With some minor plant and process modifications, the company is planning to accelerate the ramp-up of the cyanidation circuit to 2,000 tpd by January, 2014, and further ramping up to 2,250 tpd by the end of 2014; however, the company will be reducing the flotation circuit production plan from 1,000 tpd to approximately 550 tpd during 2014. Capital investments will be delayed for the installation of one of the two SAG mills and the completion of the San Juan shaft. Despite the delay of these investments, the Del Toro plant will be capable of ramping up production to 3,000 tpd during 2014 once the first SAG mill is installed. Further details will be released with the company’s 2014 guidance outlook in January.
La Encantada silver mine
A total of 931,027 equivalent ounces of silver were produced by the La Encantada plant during the third quarter of 2013. Production in the third quarter of 2013 decreased 18 per cent compared to the 1,132,399 equivalent ounces of silver produced in the second quarter of 2013 and 15 per cent compared with the 1,090,966 equivalent ounces of silver produced in the third quarter of 2012. The decrease in production during the third quarter was attributed to the breakdown that occurred in the gear and motor at ball mill No. 1, resulting in the ball mill to remain off-line for a period of six weeks. The company also used this repair period to do a complete overhaul of the ball mill and its foundation in order to have a more reliable operation in the future. Ball mill No. 1 is now fully operational and fresh ore tonnage and silver grades returned to normal levels.
Due to the reduction in quarterly production ounces, cash cost per ounce increased by 21 per cent from $8.85 in the second quarter to $10.70 in the current quarter. The increase in cash cost per ounce was attributed to a 19-pe-cent decrease in ounces produced in the third quarter, as operating costs remained fairly constant but less tonnage was processed and fewer silver ounces were produced resulting in diseconomies of scale. Now that the ball mill is fully operational, cash costs per ounce are projected to return to normal levels in the fourth quarter.
San Martin silver mine
Total production in the third quarter of 2013 was 377,816 ounces of silver equivalent, a decrease of 6 per cent compared to the 402,798 ounces of silver equivalent produced in the second quarter of 2013, but 47 per cent higher than the 257,688 equivalent ounces of silver produced in the third quarter of 2012.
Cash costs per ounce in the third quarter were $10.34, a decrease of 5 per cent from compared to $10.91 in the second quarter. The decrease in cash costs was a result of higher recoveries and an increase in gold byproduct production.
The company’s expansion project at San Martin was completed in early October. Portions of the plant upgrade such as new tanks and clarifiers showed improvements in production, recoveries and higher quality silver dore during the third quarter. The scheduled production ramp-up will increase from 900 tpd to 1,200 tpd in the fourth quarter with no delays in achieving commercial production levels and qualities. Due to a decision to swap out the older 8.5-foot-by-12-foot ball mill for a newer, larger and more reliable 9.5-foot-by-12-foot ball mill, full capacity to 1,300 tpd is expected to be reached in the first quarter of 2014.
La Guitarra silver mine
During the quarter, total production at La Guitarra was 285,256 equivalent ounces of silver, an increase of 2 per cent compared to the 280,744 ounces produced in the second quarter of 2013 and an increase of 20 per cent compared with the 237,803 ounces in the third quarter of 2012, which was the first quarter of La Guitarra operations under First Majestic’s ownership.
Total cash cost per ounce in the third quarter were significantly reduced by 57 per cent to $5.63 per ounce, compared to $13.21 per ounce in the previous quarter. As a result of a new smelting and refining agreement, the company achieved a significant $4.49-per-ounce reduction in treatment charges and transportation costs. The 57-per-cent decrease was primarily attributed to the smelting and refining costs and also an increase in gold byproduct credits.
During the third quarter, production ore came from areas within the La Guitarra vein which contained higher gold grades in conjunction with lower silver grades. Looking ahead to early 2014, the average silver grade is expected to improve once production commences at the new Joya Larga structure. This new area has indicated grades ranging between 200 g/t and 350 g/t of silver.