dt03mbb/E+ via Getty Images

dt03mbb/E+ via Getty Images

First Majestic Silver (NYSE:AG ) is a silver mining company that some of our members like to trade. We last felt it was a good buy as it dipped to $11-$12. We still think that the pressure on precious metals has been overdone in this inflationary environment. We recognize that cryptocurrency is largely serving as a hedge recently, but gold and silver will find footing as the dollar continues its long path of weakening, despite recent moves. You need to have SOME silver and gold exposure for the long-term, and in the medium-term presently given that inflation threats are everywhere, you might be overweight. We think 2-3% of your portfolio should be in this asset class. The just reported earnings from First Majestic appear to be a miss, but they inventoried a bunch of silver which impacted the results. They basically are rolling the dice on better silver prices in the near future. There were some positives and negatives to be aware of but we still see shares as a buy.

Now, while we prefer physical holdings, followed by the ETFs that track them, and then the streaming and royalty companies, the miners can make you some solid money if you time your entry efficiently. While that can't be done with ease we want to try and buy low, sell high. Simple right? Well, precious metals in our opinion have more upside than downside risk from here. The stock itself is at the higher end of a buy range, though we really like it at $11.

With silver and gold having retreated in recent months, we think there is opportunity given that the immediate inflationary pressures have only increased. The signs are everywhere, but most easily detected in simple shopping experiences looking at prices. Whether it is transitory a period of possible hyperinflation is yet to be determined, but either environment should support metals prices. In the last few months they really have not, but this disconnect should soon be rectified either through inflation declining, or metals catching a bid.

So, the company missed on the top and bottom line, but the key reason for underperformance on the headline measures was that the company elected to inventory a bunch of silver. That is important to understand. But that actually is good news for the dividend. President and CEO Keith Neumeyer stated:

Our decision to inventory a significant amount of silver during the quarter obviously impacted our third quarter financial results...those additional revenues and cash flows are expected to be realized in the coming quarters as prices improve...the upcoming future quarter dividends are expected to increase as this large inventory is divested.

That is key to realize. The decision not to sell a big chunk of silver was a short-term hit, but those sales will benefit future cash flow and dividends. In the quarter, improved production rates and still strong metal prices during the quarter relative to Q2 lead to still solid revenues. Obviously, metals prices matter tremendously to miners in the space, but so does volume, and it was the latter that led to some underperformance, at least on the headlines. That said, the higher the pricing, the better the margins on ounces produced. Revenues totaled $124.6 million, down 1% compared to Q3 2020. Again, the company held on to 1.4 million ounces of silver for future sales at better prices. We will see if that risk pays off.

Metals prices were up year-over-year, but down 15% from Q2 2021, which is why the company decided to wait to sell. First Majestic realized an average silver price of $23.10 per ounce, a 2% increase compared to Q3 2020. This price increase was coupled with a solid increase in production, but lower sales volume. Total production was 7.3 million silver equivalent ounces, consisting of 3.3 million ounces of silver and 54,525 ounces of gold. These were also nice increases from last year representing an increase of 1% and 17%, respectively for silver and gold. They were helped by more mines being online, and most specifically by a 39% increase in gold production from the Jerritt Canyon operation in Nevada.

We still would like to see First Majestic improve on costs. Cash cost for the quarter was $14.09 per silver equivalent ounce, compared to $13.89 per ounce in the previous quarter. There were higher ore costs and costs were high in Jerritt Canyon where there was the big 39% increase in gold production. That said, AISC in the quarter was $19.93 per ounce and still increasing when compared to $19.42 per ounce with the previous quarter. While there were some lower costs at San Dimas and La Encantada, Jerritt Canyon's costs weighed. At this project we also saw $22.4 million of the $59.7 million in capex spending.

Overall the company posted fine earnings when we consider the 1.4 million ounces that were inventoried. The company still has strong margins, but the costs need to be reined in. In fact, the decisions made, coupled with the high capex led to a losing quarter. Adjusted net loss for the quarter was $18.4 million or EPS of -$0.07. Ouch. The company did have positive cash flow per share, but the entire quarter was driven by inventorying silver.

So where do we go from here. We like that the company will be waiting for better silver prices to sell. It is a risk, but we also see better silver prices in the future. While we cannot predict exactly where precious metal prices will go, inflation is here, and that is definitely a positive for metals overall. The company has $193 million in cash and strong working capital, with over $260 million there. But we have harped on costs. And now that the company is almost done funding the major expenses to get project investments going, we see costs coming down in Q4 while production is boosted. That is a good buy signal.

We still have one spot left at our 15% discount, which stacks on the 58% discount annually. Stop wasting time and join BAD BEAT Investing.

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in AG over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.