First Majestic Silver Stock Isn’t a Sparkling Buy Here

2020 has not been a good year for shareholders of silver miner First Majestic Silver (NYSE:AG). Year-to-date, AG stock is down about 43%. In comparison, the Global X Silver Miners ETF (NYSEARCA:SIL), one of the largest silver miners exchange-traded funds, is down about 19%.

First Majestic Silver Stock Isn't a Sparkling Buy Here

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The suddenness of the recent correction in broader markets is making investors wonder if commodities like silver as well as silver miners should be in their portfolios. More importantly they are questioning whether AG stock would be able to participate in a potential rally in the sector. Let’s take a closer look.

AG Stock’s Fiscal Year 2019 Earnings Were Mixed

On Feb. 18, First Majestic Silver released financial results for the fourth quarter and full year for 2019. The company currently focuses mainly on silver production in Mexico. It owns and operates the San Dimas Silver/Gold Mine, the Santa Elena Silver/Gold Mine and the La Encantada Silver Mine.

In 2019, gross revenue by metal was silver (58%), gold (39%), lead (2%) and finally zinc (1%).

The group reported a net loss of $39.9 million, or 19 cents per share, for Q4, narrowing by 76% year over year, from a loss of $164.4 million, or 85 cents per share.

And for the full year, the company decreased its net loss to $40.5 million, or 20 cents per share, from a loss of $204.2 million, or $1.11 per share, in 2018.

Last year AG stock bulls were especially happy to highlight the company’s improved production levels and operational cash flow.

On the other hand, in 2019, the price of silver went up about 13%. Thus, the group was not profitable in a year when silver prices went up. And many investors are concerned about the net loss levels.

So far in the last six months, the bullion is down 6.3%. If it stays depressed, how can investors expect First Majestic Silver to be profitable during the year?

Could an Increase in the Price of Silver Help AG Stock?

To fully appreciate the price dynamics of silver, it’d be important to understand the role silver currently plays globally. Like gold, silver is considered a precious metal and is used as an investment medium in the form of bullion, coins, jewelry, or utensils, i.e. table silverware.

As silver exhibits high levels of  electrical and thermal conductivity, it also has an important role in industrial production, too. Indeed over 50% of the annual silver demand comes from industrial applications. But only about 10%-15% of global gold demand comes from industrial use (i.e., the rest is used in jewelry making or as investment).

This means that the two metals do not have exactly the same price dynamics. Economic growth can easily affect the price of silver, making it rather volatile.

Currently the price of silver is around $17 per ounce. February saw the price of the bullion become especially choppy — with a downward bias — on worries that the spread of the coronavirus globally may impact industrial demand adversely.

In 2019, AG stock more than doubled. It went from about $6 to hit a 52-week high of $12.69 (Dec. 31, 2019). Now the share price is hovering around $8.

A silver miner’s stock price is in general supported by strong silver prices, solid production and improving costs. Therefore, a potential increase in the ounce price of silver may easily help push AG shares up, as its main focus is on silver mines.

However, from a fundamental perspective, I find the stock to be overvalued. For example, its price-sales (P/S) ratio is about 7x. Analysts prefer a low P/S multiple, ideally below 1x. But a P/S number between 1x and 2x is more common. To put the metric into perspective, the S&P 500’s average price-sales ratio is 2.1x.

What Is the Gold-to-Silver Ratio?

I’d also like to briefly discuss the gold-to-silver ratio. Analysts use it to calculate how many ounces of silver it’d take to purchase one ounce of gold.

Academic research highlights that “although [prices of gold and silver] tend to move in the same direction, the pace of price growths and declines is different. Silver price is more volatile and its price moves tend to be stronger. As a result, the gold-silver ratio isn’t stable but it changes remarkably over time.”

Currently, the ratio sits over 97. Historically, it has been around 60.

Although silver price has been falling in recent weeks, gold has recently hit a high for 2020. In fact the gold spot price is up over 40% YTD, hovering around $1,650 per ounce.

In other words, when we analyze the historical levels of the gold-to-silver ratio, silver has been underperforming gold. What could this mean for the price of silver?

If you think that the ratio would eventually revert back to the mean, i.e. toward the 60 level, then either the price of silver would have to go up or the price of gold would have to go down.

My bet is on the price of silver going up in the long run. However, for now, we’re likely to witness high levels of volatility in the metal.

Nonetheless, given the uncertainty regarding the global economic effects of the COVID-19 viral outbreak, your guess is possibly as good as anyone else’s.

Investor Takeaway

A rising tide usually lifts most stocks in an industry. Thus if you believe that the price of silver may go up in the coming months, then you may want to consider adding a mining stock like First Majestic Silver to your portfolio.

But if you are an investor who also pays attention to technical charts, then you may be interested to know that I’m not expecting AG stock to make a sustained move up any time soon. In contrast, a down move toward $6 could come before a potential leg up in price.

Therefore, if you’d like to have silver or silver miners exposure, but are nervous about putting all your eggs into one basket in the industry, then you may also consider buying an ETF such as the iShares Silver Trust (NYSE:SLV), the ETFMG Prime Junior Silver ETF (NYSEARCA:SILJ), the iShares MSCI Global Silver Miners ETF (CBOE:SLVP) or the Global X Silver Miners ETF.

Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, she held covered calls on SIL (March 20 expiration).

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