First Majestic Silver - Earnings Call - Q4 2024

Transcript

Operator (participant)

Thank you for standing by. This is the conference operator. Welcome to the First Majestic Silver 2024 Production and Results Financial Results and 2025 Guidance Conference call. As a reminder, all participants are in a listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star, then one on your telephone keypad. Should you need assistance during the conference call, you may reach an operator by pressing star and then zero. If you are participating through the webcast, you can submit a question in writing by using the form in the lower section of the webcast frame on your screen. 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.

Keith Neumeyer (President and CEO)

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 was put out recently. Before I get into our discussion, we're just going to pass the call over to Samir Patel, our General Counsel, who will read our disclaimer.

Samir Patel (General Counsel)

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 with 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 quarterly 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's discussion and analysis, as well as the risk factors set out 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 profiles on both SEDAR+ and on EDGAR. Investors are cautioned against attributing undue certainty or reliance on any forward-looking statements made during today's call, and the company does not intend 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.

Keith Neumeyer (President and CEO)

Thanks, Samir. In addition to Samir and myself, Keith Neumeyer, CEO and Founder, is on the phone today. We have Mani Alkhafaji, who's our VP of Corporate Development, and Steve Holmes, who is our Chief Operating Officer. We also have Darrell Rae and Joel Theisinger, 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 who've been monitoring the shares, obviously, we created quite a liquidity event for Gatos's 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 Silver'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 that a news release like today or news releases in the future, when we get our Q1 numbers out, which will be pretty fantastic, including with Gatos's transaction and Q2 will be a full quarter of all mines producing, it'll be a pretty interesting 2025 as the year evolves. But just focusing on the news release and Q4 and 2024, we had record cash flow in Q4. I'm not going to go through the news release and read it all out to you, but $68 million in our cash flow, pretty significant, amazing safety record, all-time low reportable loss incidences. We met our 2024 guidance, 21.7 million ounces of silver equivalent production, and all at the same cost at $21.11.

We had record production at Santa Elena for the first time ever, breaking through 10 million ounces of production, which is really nice to see. It got close in 2023, but in 2024, it actually broke through 10 million ounces, which is obviously a pretty good situation. 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, just 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, 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 has continued through January and into February, and we expect to continue that program. These share prices are pretty ridiculous, in our opinion anyway, so we'll continue to 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 obviously a pretty nice situation, and we look at Los Gatos as almost a lookalike asset, Los Gatos being 103,000 hectares in size and Santa Elena being 102,000 hectares in size. These are two very large, chunky land packages that have exploration upside that is hard to measure.

Both of these operations have mine lives currently of close to 10 years, and it's a nice place to be to have three 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 concerned about finding more ounces." But it's nice to have three solid assets in our portfolio. The Mint has done well. We had a great Q4 at the Mint, as you can see in the news release today, over nine 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 expand 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, silver equivalent.

About 53% of that percent is silver, about 30-some-odd percent is gold, and the rest is in the form of lead and zinc. 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 AIF in March, which will show the changes in resources, which I look forward to seeing. In 2025, we're actually planning to drill about 270,000 meters of drilling. It's a pretty darn big program. The big focus for the next several months is integrating Gatos. 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 does take time. Different technologies have to merge together, and it does take time. There's cost, effectiveness, and that'll 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, make plans 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 (participant)

Thank you, Keith. We will now proceed to the question and answer session. Once again, to join the question queue, you may press star and then one on your telephone keypad. You will hear a tone acknowledging your request. If you are using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star and then two. If you are participating today through the webcast, you can submit a question in writing by using the form in the lower section of the webcast frame on your screen. And your first question today will come from Heiko Ihle with H.C. Wainwright. Please go ahead.

Heiko Ihle (Managing Director and Senior Metals and Mining Analyst)

Hey there. Thanks for taking my questions, and 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, and inflation factor is built into 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?

Keith Neumeyer (President and CEO)

Thanks, Heiko. Nice hearing from you. Thanks for having the question for us. I'm going to pass that question on to Steve.

Steve Holmes (COO)

Okay. Thanks, Keith. So right now, our guidance for next year, we're using a 19.5 to 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%-4.5% general inflation rate. And we've 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.

Heiko Ihle (Managing Director and Senior Metals and Mining Analyst)

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

Keith Neumeyer (President and CEO)

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, October. We had our 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 been hiring people, putting the right people in place. And it's a young business. The business is actually going to only reach its one-year anniversary next month. So it's hard to expect to see major profits out of such a new business. But it is doing quite well. 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 up.

It's our ounces coming from San Dimas that go through Asahi for refining, which has small costs there, and then those 1,000-ounce commercial bars get armored car'd up to Las Vegas into the Mint, where they get converted into a variety of different products and sold into the marketplace between a $3-$5 cost above spot, depending on the product. Some products are produced with limited quantities. Like the Trump Bar was only I think we only produced 2,400 of them. The 1776 Bar, 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 that for quite some time, unfortunately, but it finally came out.

There's no limited run on that one. We'll just keep making them as they sell. It's selling quite well. The Buffalo has come along quite nicely as well. There's a couple of other products. We have three additional products that will be released in 2025. We got about, let me 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 continually grow that year after year.

Heiko Ihle (Managing Director and Senior Metals and Mining Analyst)

Fair enough. Yeah, I was on the website earlier today, and they do a great job displaying the Freedom Bar and the 20th Anniversary Rounds being almost sold out. So that's pretty cool. Anyways, I'll get back with you. Thanks for taking my questions.

Keith Neumeyer (President and CEO)

Okay. Thanks, Heiko.

Operator (participant)

Your next question today comes from Charles Ottoman with Scotiabank. Please go ahead.

Charles Ottoman (Analyst)

Thanks for taking my question. Hi, Mani and team. I'm just asking you on behalf of all these. I think my first question here would be, how should we weigh production and CapEx between the first half and second half of the year? Are you expecting it to be flattish, say, for the closing of the Gatos acquisition? I know that's supposed to impact production at Gatos, but beyond that, should we expect a flattish production for this year?

Keith Neumeyer (President and CEO)

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

Mani Alkhafaji (VP of Corporate Development)

Yeah. We're looking here. Yeah. Chris, maybe just, oh, sorry, Charles, repeat the question if you don't mind. We didn't hear it clearly.

Charles Ottoman (Analyst)

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

Mani Alkhafaji (VP of Corporate Development)

Yeah. So it'll be relatively consistent. So H1 versus H2. Gatos is coming in early enough in the year, January 16, so we don't have a lot of delays integrating it. So it's going to be relatively consistent. Just generally, in Q4, our exploration program does slow down. So you'll probably see a bit of a drop-off in Q4 from the exploration program. But for the most part, it's relatively consistent, quarter-over-quarter.

Charles Ottoman (Analyst)

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

Mani Alkhafaji (VP of Corporate Development)

Yeah. So we have an 18,000-meter program at Jerritt. It's really going to go back and target some of the targets that we were hoping to get in 2024, but we weren't able to just due to delays in permits and the underperformance 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 going to be. It's really greenfield exploration, targeting areas that haven't been explored before. We have received the permits at the end of 2023 that really haven't in areas that haven't been explored. So that's going to be the focus in 2025, is go back and test those targets.

Charles Ottoman (Analyst)

Okay. And just on free cash flow, I mean, it's good to see the company generated a 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 on a moving forward basis here?

Mani Alkhafaji (VP of Corporate Development)

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

Keith Neumeyer (President and CEO)

Yeah. 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 our exploration program is already pretty aggressive. Our development program is also pretty aggressive. I'd really like to see treasury growth. Any extra capital that we're going to be gaining throughout the year, I want to see 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.

Charles Ottoman (Analyst)

Okay. Thank you. That's all for me.

Keith Neumeyer (President and CEO)

Okay. Thank you.

Operator (participant)

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

Don DeMarco (Precious Metals Equity Research Analyst)

Thank you, Operator. And Keith, congratulations to a strong quarter, positive free cash flow. And that Gatos's acquisition, I mean, the 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?

Keith Neumeyer (President and CEO)

You guys are pretty close to the market, and thanks for your assistance throughout the process as well. 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. Our due diligence team is made up of a handful of people that just follow the space. We gobble up all the news that different companies put out, and we absorb it all and put it all in Excel worksheets. We analyze everything, and we categorize everything and rate everything. Look, we just bought Gatos, right? It's the largest transaction ever in 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 team, because some of the integration team is some of the same team that's doing the—or pardon me, some of the M&A team, pardon me, is some of the same team that's doing the integration. So I'd rather our team focus 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 two to tangle. We're not in any rush to do another deal tomorrow.

Don DeMarco (Precious Metals Equity Research Analyst)

Okay. Thanks for that, Keith. Well, that's all for me, and good luck with Q1.

Keith Neumeyer (President and CEO)

Thanks a lot, Don.

Operator (participant)

Your next question today will come from Chris Ewing, private investor. Please go ahead.

Chris Ewing (Founder and Managing Partner)

Congratulations on your good work here in your purchase of Gatos. I was just wondering, what silver price do you think that we will need till 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? Thank you.

Keith Neumeyer (President and CEO)

The company already pays dividends. You should know that we do that. It was announced in today's news release that the board approved the dividend payment. That dividend's been paid, I think, for over two years. I actually forget when we actually started it. When it comes to earnings, there's so much noise about earnings. 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.

Every single quarter, the Mexican peso moves around, and it can change the bottom-line earnings number by significant amounts. 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. We have something in the order of $150 million worth of pesos sitting on our books, and those pesos are used to run the business. Because we report in U.S. dollars, those pesos move around, and then it creates a loss or a gain. It can be quite different from one quarter to another. It does create a ton of confusion. The audit committee has this discussion with our auditors who are Deloitte on a regular basis on what we can do about this.

There's really nothing we can do. It's just a fact of running a foreign business in Mexico, which is a volatile currency, and reporting in U.S. dollars. It's just a lot of our money. Half of our money is in U.S. dollars. Half of our money is in pesos. We've got Canadian dollars, of course. We've got euros, of course, as well. But nevertheless, it's the peso that really drives this profit and loss number. I'm not sure, Mani, if you want to jump in and comment any further.

Mani Alkhafaji (VP of Corporate Development)

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 you'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 non-cash foreign exchange loss, and that ends up hitting the P&L, unfortunately in this case, but it's at a negative. But to your earlier points, what silver price is needed for positive earnings, I do think this trend continues with Gatos coming in. We'll have no problem really showing continuous improvement quarter over quarter. And yeah, be able to look out for Q1 and Q2.

Chris Ewing (Founder and Managing Partner)

Thank you very much. Appreciate your time.

Operator (participant)

Again, if you have a question, please press star and then one. 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.

Darrell Rae (Investor Relations Officer)

Thanks, Nick. So we have a couple, Keith, 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?

Keith Neumeyer (President and CEO)

Yeah. 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, he was talking about increasing taxes for miners, and they did slow down the permitting process, and so on, frustrating many mining companies, but it was just basically a very kind of totalitarian kind of anti-business type environment in Mexico for the last five years, which is quite unusual because when we put the company together 21 years ago, Mexico was a pretty friendly place to be as a Canadian company.

And we were able to build a business quite quickly just because of the regulatory environment in Mexico over that 15-year period and until this newer government came in. So now, 21 years in, we've got a new government. Claudia Sheinbaum, she seems to be pretty open, much more pragmatic, much more business-oriented, saying a lot of the right things. It's only been a couple of months, so it's hard to really point at any major events or positive events that could be affecting the mining sector. But I can tell the people who are listening today that there are permits that have been 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 we're being told we're going to be getting as well.

So the environment looks like it's changed a lot. So we're crossing our fingers that what we're hearing or what we're thinking is actually real. And this current Mexican government is open for business and open for foreign investment. And we did make a decision to buy Gatos for a reason. We've got four 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 as we are about what the future is for Mexico, I don't think we'd have done a Gatos transaction. Anything else though?

Darrell Rae (Investor Relations Officer)

Thanks, Keith. There's one more question here. We're getting a few, but I'll just put them all together. But one is your general thoughts with gold hitting all-time highs. Will silver catch up? And I know we only have a quarter-hour 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.

Keith Neumeyer (President and CEO)

Yeah. Well, I get criticized constantly for my triple-digit silver call. So even recently, I just saw someone else throw some mud my way. But yeah, 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 is 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 it should be at. And not that I don't like $33 silver. It's not a bad place to be.

If you look at our lifetime, silver's only been over $30 three times in my life, and it's been over 30 for a good part of 2024 and is holding ground quite nicely. And gold continually 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, who have these huge paper contracts. But that's just the way the market works. And once we get through this $35-$38 range, which I think are the two biggest resistance levels, it'll slice through $40 and through $50 pretty quickly. And I think it's going to be on its way to 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.

Darrell Rae (Investor Relations Officer)

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

Operator (participant)

Thank you. Showing no further audio questions, as we'll conclude our question-and-answer session. I would like to turn the conference back over to Keith for any closing remarks.

Keith Neumeyer (President and CEO)

Thank you, everyone, for joining us today. 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. 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 probably all know Mani or Darrell or Joel. Just any three of them are always available to chat with. We'll see you at the PDAC for those of you calling from Toronto. Have a great day.

Operator (participant)

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