Key Insights

First Majestic Silver's estimated fair value is CA$10.20 based on 2 Stage Free Cash Flow to Equity With CA$10.57 share price, First Majestic Silver appears to be trading close to its estimated fair value Our fair value estimate is 22% higher than First Majestic Silver's analyst price target of US$8.38

Today we will run through one way of estimating the intrinsic value of First Majestic Silver Corp. (TSE:FR) by taking the expected future cash flows and discounting them to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

View our latest analysis for First Majestic Silver

The Method

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:



10-year free cash flow (FCF) forecast

2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 Levered FCF ($, Millions)  US$8.44m US$103.4m US$114.9m US$123.4m US$130.5m US$136.6m US$141.8m US$146.5m US$150.8m US$154.7m Growth Rate Estimate Source Analyst x2 Analyst x2 Analyst x1 Est @ 7.41% Est @ 5.78% Est @ 4.64% Est @ 3.85% Est @ 3.29% Est @ 2.90% Est @ 2.63% Present Value ($, Millions) Discounted @ 7.5%  US$7.8 US$89.4 US$92.4 US$92.3 US$90.8 US$88.3 US$85.3 US$81.9 US$78.4 US$74.8

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$781m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.0%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 7.5%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$155m× (1 + 2.0%) ÷ (7.5%– 2.0%) = US$2.8b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$2.8b÷ ( 1 + 7.5%)10= US$1.4b

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$2.2b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of CA$10.6, the company appears around fair value at the time of writing. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind. dcf

Important Assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at First Majestic Silver as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 7.5%, which is based on a levered beta of 1.206. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for First Majestic Silver

Strength

Debt is not viewed as a risk.

Weakness

Dividend is low compared to the top 25% of dividend payers in the Metals and Mining market.

Expensive based on P/S ratio and estimated fair value.

Shareholders have been diluted in the past year.

Opportunity

Forecast to reduce losses next year.

Threat

Has less than 3 years of cash runway based on current free cash flow.

Revenue is forecast to decrease over the next 2 years.

Looking Ahead:

Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. It's not possible to obtain a foolproof valuation with a DCF model. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For First Majestic Silver, there are three relevant elements you should explore:

Risks: We feel that you should assess the 1 warning sign for First Majestic Silver we've flagged before making an investment in the company. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for FR's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors. Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the TSX every day. If you want to find the calculation for other stocks just search here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.