As the world’s purest silver producer, First Majestic Silver Corp. (TSX:FR) (NYSE:AG) is uniquely positioned to ride the potential jump in silver prices
The pandemic is wreaking havoc on our society and on the world economy.
It’s crippling industries, driving unemployment to a projected peak of 25%—which would rival the worst of the Great Depression—and has already resulted in the Fed expanding its balance sheet to 6 trillion dollars.
But this storm cloud has a silver lining.
History tells us that all this chaos could potentially drive the price of silver to once-in-a-lifetime price levels.
That’s right, silver… not gold.
While even the most inexperienced traders know that gold is almost the perfect play during a recession, students of history know that in these types of market conditions the spot price for silver not only tends to catch up to gold, it often surpasses it in the long run.
This could result in a very significant price swing from where silver is sitting now.
It would also mean that top silver producer, First Majestic Silver (TSX:FR) (NYSE:AG) is poised to make history in the coming months.
Why First Majestic? Well, two simple reasons:
- It has one of the highest silver production capacities, and
- Most of its revenue comes from silver than compared to any of its peers
This isn’t just a silver stock pick… First Majestic is THE all-in silver play for the current market. In fact, it’s Founder and CEO Keith Neumeyer, is so bullish on silver he tweeted the following statement on March 19th:
Now, let’s delve into a few specific factors that could make silver this era’s best play.
Silver Supply Squeeze
Silver prices are facing a near-term supply squeeze catalyst, mainly due to the global pandemic shutting down mining operations.
As First Majestic Silver’s (TSX:FR) (NYSE:AG) CEO, Keith Neumeyer, told Kitco in a March 2020 video interview:
“In 2018, we produced, as a global industry, 855 million ounces of silver. So far, we’ve had Peru come offline, with 145 million ounces, we’ve had Chile come offline with 42 million ounces, we’ve had Argentina come offline with 26.5 million ounces. That’s a total of 213.5 million ounces that has now been shut down.”
On top of that, The Silver Institute points out that, in 2019, silver mine supply declined for the fourth consecutive year, while demand is projected to increase 3% due to silver’s extensive and growing list of industrial uses.
There are 2 catalysts that have historically come together to drive silver to its record highs.
CATALYST #1: Rise in Inflation
With the Fed creating money at unsustainable rates to prop up the markets, it’s reasonable to expect a rise in inflation.
“Monetization of debt, including the potential implications for inflation, makes hard assets like silver attractive.”
– Bank of America (kitco.com, April 23, 2020)
Silver’s two greatest modern-day rises happened during inflationary environments: the runaway inflation of the 1970s, and when investors feared inflation during the Great Recession.
Just how much did silver rise during those periods? And what would a similar rise do to the price of silver today if it was only $15? See for yourself:
Based on the sheer scale of currency abuse underway, and the inflation it’s likely to produce, a similar price growth for silver is not only possible, it’s perfectly in line with history.
CATALYST #2: Silver’s Long Fuse
There have been 5 precious metal bull markets in modern history. The first lesson we can learn from them is that silver and gold typically follow this pattern
- Silver typically lags gold,
- Then catches up to gold
- Then silver surpasses it
Why? Because investors flock to gold in the early days of the crisis. But as gold becomes too expensive, they turn to silver to protect their money.
Silver’s current price behavior is now right on track to follow this model based on four out of the last five bull market runs.
So, if history is about to repeat itself with another silver price jump, where are we at in the timeline?
Based on the price jump from 1980 (see the chart below), we’re predicting that silver could start making a move in the next 6 to 8 months if history repeats itself.
This news is fantastic for First Majestic Silver (TSX:FR) (NYSE:AG), but we still need to take a quick look at the investment demand and the gold-to-silver ratio before investors can fully understand just how positive this news really is.
Gold-To-Silver Ratio is at an All Time High
One major historical statistic investors are excited about is the current gold-to-silver ratio. This is the amount of silver it takes to purchase one ounce of gold.
The ratio’s long-term average over the last several decades has been between 50:1 and 80:1.
When the ratio is high (e.g., over 80), investors commonly view silver as inexpensive compared to gold, making it the preferred investment. On May 14, 2020, the ratio stood at 109, beating out the previous all-time high from February 1991.
The lesson to learn from history is that while the gold-to-silver price ratio may remain at 100+, the ratio tends to close the gap within a year of a recession starting, then silver really gets going after the recession has ended.
But as we’ve already seen, with the Fed printing money in full swing it seems more likely that the gold-to-silver ratio would bring itself back to “normal” levels through a steep increase in the price of silver.
Growing Investment Demand
Global silver investment jumped 12% in 2019 for its largest annual growth since 2015, and it’s projected to rise 16% this year to a five-year high.
“Our rate of sale in just the first part of March exceeds 300 percent of what was sold last month.”
In March 2020, the US Mint sold out of 2020 American Silver Eagle coins saying, “Our rate of sale in just the first part of March exceeds 300 percent of what was sold last month.”
To put this surge of demand for silver into perspective, it’s the largest physical coin premium since Lehman Brothers failed in 2008 and Ben Bernanke disappointed the markets in 2011.
“A small change in prices is a larger percentage change for silver – and that upside attracts additional investors.”
– Edmund Moy, former director of the US Mint
3 Criteria for the Ideal Silver Producer Stock
So, if silver holds to its historic nature with a big surge, what would be the criteria for the ideal silver producer stock?
CRITERIA #1: Highest percentage of revenue coming from silver production
CRITERIA #2: Proven track record of increasing silver production
CRITERIA #3: Actively investing in improving silver recovery rates
Let’s take a look at how First Majestic Silver (TSX:FR) (NYSE:AG) fits the bill on all those points, giving them the greatest opportunity for gains from a jump in the silver price.
CRITERIA #1 of 3:
Highest Percentage of Revenue Coming From Silver Production
After 18 years in the industry, First Majestic Silver (TSX:FR) (NYSE:AG) has a significantly higher percentage of revenue from silver than all of their peers.
“We continue to lead the industry as the purest silver producer and remain focused on improving margins through the adoption of new technologies.”
– Keith Neumeyer, President and CEO of First Majestic
The table below includes some additional industry leaders with far lower percentages of revenue from silver, including Wheaton Precious Metals and Newmont Corporation.
First Majestic Silver’s (TSX:FR) (NYSE:AG) stock has continued to be a go-to and top performer in its space.
And with all the signs pointing to a serious rise in silver prices, First Majestic Silver (TSX:FR) (NYSE:AG) could start attracting the eyes of major institutions and investors alike. (Not to mention that 39% of their revenue comes from gold, which is on the rise.)
To see an example of how investors in First Majestic Silver (TSX:FR) (NYSE:AG) benefited when the silver price went up in 2016, look at the 2 charts below. The first chart shows silver’s price jump from around USD $14 to $20 – that’s a 43% increase.
The second chart shows how First Majestic Silver’s (TSX:FR) (NYSE:AG) stock jumped at that same time in 2016 from around USD $3 to over $18 – that’s a 500% increase.
Keep in mind, that the 500% stock price gain was with silver only going up 43%. Who’s to say what the effect would be on First Majestic Silver’s (TSX:FR) (NYSE:AG) stock if silver rose like either of its 2 biggest modern-day increases.
CRITERIA #2 of 3:
Proven Track Record of Increasing Silver Production
With a potential silver price jump on the horizon, the ideal silver producer stock would also need to produce lots of silver and have proven mines…which First Majestic Silver (TSX:FR) (NYSE:AG) does.
2019 was a record-breaking year for First Majestic Silver (TSX:FR) (NYSE:AG), having produced 25.6 million silver equivalent ounces, which was a 15% increase over 2018.
Their 3 active mines – San Dimas, Santa Elena and La Encantada – represent combined reserves of 146.5 million silver equivalent ounces.
The chart also shows that their average grade of silver equivalent is moving in the right direction due to all the drilling they’ve been doing.
- First Majestic Initiates NAFTA Arbitration Process Against Mexico for Violating International Law
- First Majestic Produces 6.2 Million Silver Equivalent Ounces in First Quarter
- First Majestic Provides Update on Operations
- First Majestic Updates 2019 Mineral Reserve and Resource Estimates
- First Majestic Acquires Shares in GR Silver – Early Warning
3 Smart Mine Acquisitions
First Majestic Silver (TSX:FR) (NYSE:AG) has a knack for acquiring distressed or neglected mines and turning them around. A large reason for that success is the leadership of the company’s Founder, President, CEO and long-time outspoken silver sector advocate, Keith Neumeyer (more on Keith in a moment).
The land package is extremely large with over 350,000 hectares (~865,000 acres) of mining claims in Mexico, the world’s largest silver producing country.
Here’s a quick overview of First Majestic Silver’s (TSX:FR) (NYSE:AG) 3 producing mines.
MINE #1: San Dimas Silver/Gold Mine
San Dimas is First Majestic Silver’s (TSX:FR) (NYSE:AG) lowest cost and highest producing mine (~50% of overall production).
First Majestic acquired the flagship mine in 2018 for $320M (that means the mine would likely have paid for itself in roughly 3 years).
Since the acquisition, First Majestic Silver (TSX:FR) (NYSE:AG) has reduced the mine’s production costs by over 20% to $125/tonne.
MINE #2: Santa Elena Silver/Gold Mine
First Majestic Silver’s (TSX:FR) (NYSE:AG) Santa Elena was acquired in 2015 for CDN $154M (USD $105M)and currently produces over 5 million ounces of production. In 2016, the company made a significant discovery at the Ermitaño Project located 4 km (2.5 miles) to the southeast of the mine.
A Pre-Feasibility study on the Ermitaño Project is planned for Q4 2020, with initial production expected in 2021, which would increase overall production at Santa Elena.
Ermitaño Project Indicated & Inferred Resource
MINE #3: La Encantada Silver Mine
First Majestic Silver (TSX:FR) (NYSE:AG) acquired La Encantada in 2006 and has expanded the operation to its current capacity of over 3 million silver ounces per year.
CRITERIA #3 of 3:
Actively Investing to Improve Silver Recovery Rates
In 2019, First Majestic Silver’s (TSX:FR) (NYSE:AG) annual consolidated silver recovery rate was 86%, its highest ever.
The company achieved that feat through multiple ongoing investments in processing and innovation. For example, a new 3,000 tpd high-intensity grinding (“HIG”) mill installed at Santa Elena, the only one of its kind in Latin America.
The HIG mill gives First Majestic Silver (TSX:FR) (NYSE:AG) higher recovery rates, as seen in the chart below where silver recovery jumps up by over 5%…
A future catalyst for First Majestic Silver (TSX:FR) (NYSE:AG) is an expected boost to silver recovery rates at their San Dimas mine once they start up a HIG mill there as well in early 2021.
The chart below shows how these HIG mills are just one in a long line of processing innovations that continue to increase the company’s silver recovery rates.
Higher silver recovery rates position First Majestic Silver (TSX:FR) (NYSE:AG) to benefit even more from an upswing in the price of silver.
Leadership That Stands Apart
First Majestic Silver (TSX:FR) (NYSE:AG) has the distinct competitive advantage of being led by an outspoken and outstanding industry expert and advocate.
Keith Neumeyer, President & CEO, started out in the investment community in 1984 at a number of Canadian national brokerage firms. He moved on to work with several publicly-traded companies in the resource and high tech sectors, building out his finance, business development, strategic planning and corporate restructuring skills. He went on to be the original and founding President of First Quantum Minerals Ltd., which is a $5-billion copper company today. He founded First Majestic Silver in 2002 and First Mining Gold in 2015. He’s listed a number of companies on the TSX Exchange, gaining extensive experience around financial, regulatory, legal and accounting issues. In 2011, he won the E&Y Entrepreneur of the Year Award for the Metals & Mining category.
investors in First Majestic Silver (TSX:FR) (NYSE:AG) could realize outsized gains in the near-term.
The Coming Recession Is Setting Up Silver For Another Historic Rise In Price: Quantitative Easing is likely to create inflation. That’s expected to drive investors to buy silver after gold gets too expensive. Silver has a history of outperforming gold at that point. Higher silver prices mean more support for First Majestic Silver’s (TSX:FR) (NYSE:AG) stock.
Highest Percentage of Revenue Coming From Silver Production: First Majestic Silver (TSX:FR) (NYSE:AG) has a MUCH higher percentage of revenue from silver than their peers. That means they would be best positioned to gain from higher silver prices.
Proven Track Record of Increased Silver Production: Record-breaking year in 2019 with 25.6M silver equivalent ounces (15% increase over 2018) and record revenues of $363.9M (up 21% from 2018), coupled with ongoing reserve growth.
Actively Investing in Improving Silver Recovery Rates: Ongoing investments in processing and innovation led to First Majestic Silver (TSX:FR) (NYSE:AG) having their highest ever annual silver recovery rate of 86% for 2019.
Leadership That Stands Apart: Competitive advantage of Keith Neumeyer, President & CEO, being an outspoken and outstanding industry expert and advocate of silver.