First Majestic Aims To Capitalize On A Bullish Outlook For Silver By Increasing Production To Over 8 Million Ounces Per Year
By Alastair Ford
minesite.com
“I think we will see US$40 to US$50 silver in the next few years.” So says Keith Neumeyer, chief executive of First Majestic Silver Corp.
He’s already selling his own company’s silver at at least a 10 per cent premium to the spot price via the First Majestic website - for which click here. And he’s not afraid to get out on the road either, spreading the word about First Majestic and silver alike as he travels the globe. Thus buyers who flocked to the company’s stand at last week’s Master Investor Show in London appreciated the opportunity to get their hands on some physical silver, and weren’t in the least discouraged by the premium.
In any case, if Keith’s right, what currently passes for a premium price is going to look like a bargain over the coming years, as silver heads back towards levels not seen since the 1980s.We’ve been looking at silver in some detail over the last couple of weeks on Minesite, for which click here and here, and although we’re perhaps not quite as bullish as Keith ourselves, not to the extent of nailing our colours to the mast with a US$50 price, the signs are nonetheless pretty favourable.
Rightly, Keith starts his projections for the future silver price with an allusion to the overall macroeconomic picture. “There will”, he says, “be a complete change in the way the financial system works”. How absolutely fundamental this change will be isn’t yet clear, but no-one’s in any doubt, surely, that it’s started already. And before too long, reckons Keith, people will start to realize that the pieces of paper that governments issue, otherwise known as currencies, have very little intrinsic value. In part this is the old argument that printing money, or “quantative easing” as the governments like to call it, will cause inflation, and further undermine economic confidence. It’s also a statement of a belief that physical value is better stored in precious metal form than it is in paper form. This is a belief the Chinese seem to share, as the Chinese government has recently revealed that it’s been a big buyer of physical gold over the last few years. The next logical step would be for it to start buying silver in a big way too, partly because silver is currently trading at a substantial discount to its long-term valuation against gold. Currently 70 ounces of silver will buy you an ounce of gold, working in dollar terms, whereas the average over the last decade or so, as we highlighted in our earlier article, the average exchange rate has stood at more like 60.
But, however positive that may be in itself, Keith’s not buying it as a truly representative argument about where silver’s headed. To talk about an historic average gold:silver ratio it’s better to go back by at least 100 years, he argues. And if you do that, a mere 20 ounces of silver buys an ounce of gold. For interest’s sake, as he sets the context for an exposition about Isaac Newton, the founding of the Bank of England, and the adoption of sterling as the bedrock of the British currency, he takes us back even further: “Going back 1,000 years, silver was actually worth more than gold”, he says. Other relative valuations have changed a lot since then too, so it’s not clear how much comfort or encouragement we can really draw from such a statement. But one thing remains the same: the attractiveness of silver’s unit costs. As a store of value, gold may forever remain unsurpassed. But it’s not cheap. This may be neither here nor there to the average investment banker or hedge fund manager, but to the man in the street it does make a difference, as lower unit costs for silver actually make it more accessible. Which is one reason why the Bank of England chose it in the first place.
Thus First Majestic’s one ounce silver coins, which have a nominal spot value at the time of writing of US$12.60, and are actually available on the company website at US$14.25 an ounce, are well within the reach of the common punter looking to buy a bit of small scale insurance. Average prices for a one ounce Krugerrand over the past month have stuck at over US$950, which is a lot more eggs in the same basket for that same punter. And although sophisticated investors might regard the investing power and preferences of the man in the street as largely irrelevant to their own trading activity, it’s worth remembering if precious metals are on the way to regaining something much closer to their old status as de facto currencies, it will in part be the man in the street who will make it happen.
So where does this leave First Majestic as a business? Well, if silver does re-rate dramatically, “we’ll reap the rewards”, says Keith. For one thing, at nearly 300 million ounces, the company’s reserves and resources base is substantial. What’s more First Majestic produced 4.25 million ounces of silver last year from its three operating mines in Mexico, and is set to produce between 5.5 million and 5.7 million this year. By 2011 that should jump to over eight million ounces, as a new mine comes on stream, while costs will drop to around US$6.00 per ounce. Around 50 per cent of the current production comes in the form of First Majestic’s own dore bars, but that level will rise to 90 per cent by the end of the year. And it will be interesting to check back with Keith in a few month’s time, to find out what the latest sales figures from the company’s website are. Because retail investment demand for First Majestic’s bars and coins will be the bellwether, not only for silver, but for plenty else besides. |
