First Majestic Silver Soars
First Majestic Silver has been one of the world’s best-performing stocks in 2016, nearly quintupling at best in recent months. This outstanding Canadian silver miner runs extensive operations in Mexico, and is one of this metal’s purest producers. Despite its blistering run this year, First Majestic remains incredibly well-positioned to greatly leverage silver’s mean reversion higher. Investors should take a look.
First Majestic Silver’s amazing fundamentals won me over as a fan years ago, and I definitely have a dog in this fight. As silver was grinding along near major secular lows late last year, we recommended a new long-term investment in First Majestic at $3.20 in our monthly newsletter. Then in mid-January, as silver stocks languished, we added another new First Majestic trade at $2.51 in our weekly newsletter.
First Majestic Silver trades on the NYSE under the awesome symbol AG. That is, of course, the chemical symbol for silver on the periodic table of elements, deriving from the ancient Latin word for silver Argentum. Founded in 2002 by its current CEO Keith Neumeyer, First Majestic has steadily grown into one of the world’s elite powerhouse silver miners. And that’s no mean feat, silver mining is a tough industry.
The geology and economics of silver mining are very challenging, making major primary silver producers a rare breed. The great majority of the world’s known silver deposits were formed mixed in with gold or base metals. And the revenues derived from mining these other metals usually dwarf those from silver, relegating it to mere byproduct status. Indeed, most of the world’s silver production is simply a byproduct.
The venerable Silver Institute gathers the best global fundamental data available on silver. Its highly-anticipated report on silver supply and demand in 2015 was just released in early May. Last year, a staggering 70% of world silver mine supply came as a byproduct from mining other metals! Less than a third of the 886.7m ounces of silver mined last year came from primary silver mines, let alone primary silver miners.
Most of those primary silver mines are owned by companies that aren’t primary silver miners. Though they sometimes have “silver” in their names, the majority of their revenues are usually from gold. Out of the top 17 elite silver miners in the flagship SIL Global X Silver Miners ETF, only 7 generated over half of their Q1’16 sales from silver. And First Majestic Silver enjoyed a commanding lead on that desirable list.
Fully 69.5% of its revenues in this year’s first quarter came from silver, which crowned it the purest major silver miner in the world during that slice of time! This well exceeded the silver percentages of even Silver Wheaton and Pan American Silver, granting First Majestic Silver exceptional leverage to silver prices. And it is widely respected and owned by professional investors, as evidenced by its broad major-ETF inclusion.
First Majestic is not only one of the top components of that dominant SIL silver miners ETF, but is also included in the flagship GDX VanEck Vectors Gold Miners ETF and GDXJ VanEck Vectors Junior Gold Miners ETF! Inclusion by the managers of these elite top ETFs is the gold standard for silver miners, gold miners, and junior gold miners respectively. So First Majestic has been heavily vetted by the best.
This company operates fully six silver mines in Mexico, Santa Elena, La Parrilla (“grill”), Del Toro (“bull”), La Encantada (“enchanted”), San Martin, and La Guitarra (“guitar”). Mexico is a fantastic place to explore for and mine for silver. It’s not only geopolitically stable, but it is close to the US and Canada and easy and relatively cheap to operate in. And Mexico has been a global silver powerhouse for centuries.
Mexico was the world’s top silver-producing country in 2015, responsible for over 1/5th of global mined supply. And this is nothing new. Ever since the Spanish colonials swarmed Mexico’s shores in the 16th century, silver production has been massive. It’s believed that fully one-third of all the silver ever mined in the history of the world came from Mexico! It’s long been the epicenter of global silver mining.
Ask any hardened prospector where the best place to explore for silver is, and he’ll reply where it has already been found. Miners have spent centuries scouring Mexico’s rugged hills for silver, and have left extensive past workings. But since their technology was radically inferior to modern mining’s, they literally just scraped the surface. They mined the most-obvious veins, but left most of the silver behind.
Fascinatingly, there have been multiple silver miners who have actually included old tailings piles in their mining plans! The waste rock discarded by miners of centuries past often still has very high grades of silver by current standards. Mexico is the best place in the world to mine silver, so it has been First Majestic’s sole target. Many economies of scale and efficiency result from focusing in a single country.
First Majestic’s excellent portfolio of Mexican silver mines all have very fascinating histories, but it’s their collective economics that make this company so attractive to investors. They produced 11.1m ounces of pure silver in 2015, along with enough byproduct gold, lead, and zinc to boost silver-equivalent production to 16.1m ounces. While some diversified miners produce far more silver, this is major for a primary miner.
But even more important than First Majestic’s excellent production profile is its low costs. Last year was a rough one for silver, where it averaged just $15.68 per ounce. And it slumped to a major 6.4-year secular low in mid-December leading into the Fed’s first rate hike in 9.5 years. The resulting silver sentiment wasteland was so brutal that investors grew concerned about the very viability of primary silver miners.
Just as the true mettle of sailors only becomes evident in the fiercest storms, 2015 severely tested silver miners’ managers. And First Majestic passed through that maelstrom unscathed. Last year it was able to mine silver at cast costs of just $7.87 per ounce! That’s the acid-test measure of how low of silver prices a silver miner can temporarily bear. Mid-December’s $13.69 secular low never posed a threat at all.
Far more realistic are all-in sustaining costs, which include all expenses necessary to both maintain and replenish operations at current production levels. That runs the gamut from exploring for new deposits to replace depleting ones, developing and building mines, and reclaiming old exhausted ones. Last year First Majestic reported AISC of just $13.43 per ounce! This was well below silver’s low average levels.
And if First Majestic could earn healthy 14% operating margins even at last year’s dismal silver prices, its profits are going to skyrocket as silver recovers and inevitably mean reverts higher in its new bull market. Silver miners enjoy strong profits leverage to rising silver prices because their mining costs are largely fixed. They are mostly determined up front in the planning stages before mines are even constructed.
Geologists and mining engineers have to target specific ore bodies for extraction, figure out the lowest-cost way to dig to them, and determine the process to recover the most silver from that ore. These costs persist no matter what silver is doing, they don’t rise proportionally with silver prices. Thus growth in mining profits greatly amplifies silver’s gains, which is what makes silver stocks so alluring for investors.
In early 2016 First Majestic provided guidance for this year’s operating results. It expects to produce at midpoints of 12.7m ounces of pure silver and 18.8m ounces in silver-equivalent terms including its byproduct metals. Those are excellent 14% and 17% year-over-year production gains! First Majestic isn’t just an elite primary silver miner, but a growing one. This company has always focused on expanding.
But even more exciting than First Majestic’s projected production growth in 2016 is this year’s guidance on costs. This company expects to mine its silver at all-in sustaining costs at a midpoint of just $12.83 per ounce! That’s 4.5% lower than 2015’s results, even though the silver price will almost certainly prove to average far higher this year. So First Majestic’s operating margins are set to soar dramatically!
Silver averaged $14.90 in Q1’16, barely off Q4’15’s secular-trough average of $14.77. As I explained in an essay in late April, new silver bull markets often get off to a slow start due to the way gold dominates silver psychology. Speculators and investors don’t return to silver until after gold has already rallied far enough for long enough to convince them a sustainable new upleg is underway. So silver lags gold.
But once silver excitement inevitably starts building, silver’s gains soon surpass those of its primary driver gold. So far in Q2, silver has averaged a much-higher $16.55. First Majestic’s profits will leverage these gains. In Q1’16, this company produced 3.1m and 5.1m silver and silver-equivalent ounces at incredible all-in sustaining costs of just $8.97 per ounce due to higher byproduct production and gold prices!
When First Majestic projected 2016 way back in mid-January, it used very conservative assumptions of silver and gold averaging just $14 and $1000 this year. So as Q1’s results revealed, this company’s all-in sustaining costs are likely to come in far under its projections in 2016. This will lead to exploding profits as silver continues mean reverting higher. This is readily evident across Q4’15 and Q1’16 results.
At Q4’15’s average silver price of $14.77 and First Majestic’s AISC of $11.28, this company earned $3.49 per ounce of silver mined. That’s pretty darned impressive for a major secular trough quarter in silver! But even though the average silver price only rose 0.9% to $14.90 in Q1’16, First Majestic’s far-lower AISC of $8.97 due to far-higher gold byproduct credits made for a $5.93 profit. That’s a staggering 70% higher!
There’s no doubt silver and gold will continue mean reverting higher on balance out of last year’s ugly central-bank-conjured extreme lows. That means higher selling prices and lower all-in sustaining costs for First Majestic Silver. I don’t know how high silver will go, but it averaged $19.05, $23.80, and $31.19 in 2014, 2013, and 2012. So these are all very conservative non-overshoot mean-reversion targets for silver.
Assuming First Majestic’s AISC come in around $10 per ounce this year due to the higher gold prices, this yields huge per-ounce profits potential of $9.05, $13.80, and $21.19. Those are staggering 159%, 295%, and 507% rocketings from Q4’15’s levels! The potential profits growth First Majestic is very likely to enjoy in this new silver bull is epic. And naturally that will lead to far-higher prices for First Majestic’s stock.
First Majestic Silver is one of the best-performing stocks out of all the precious-metals miners this year. Between mid-January and its latest high in mid-May, AG has skyrocketed an unbelievable 381.3% higher in just 3.9 months! Enjoying a near-quintupling in a matter of months is very rare even in this volatile sector. After such a blistering catapult higher, investors are naturally wondering if it is too late to buy AG.
This next chart offers some crucial insights on that important question. It looks at First Majestic Silver’s stock price in recent years along with key technical lines including its 50-day moving average, 200dma, and 2.5-standard-deviation Bollinger Bands superimposed on the silver price. Considering the secular-low extremes AG has just recovered from, a quintupling is merely a totally-justified mean-reversion rally.
Back in mid-January, AG slumped to a brutal 6.3-year secular low. With silver not far off that 6.4-year secular low of its own, investors’ sentiment was so exceedingly bearish that they continued to doubt the very survivability of the primary-silver-mining industry! In a rather-amazing testament to how bad things were in precious-metals-stock land, AG’s secular low was actually pretty mild compared to most of its peers’.
That same day AG bottomed, the flagship HUI NYSE Arca Gold BUGS Index dropped to an extraordinary 13.5-year secular low of its own! As I pointed out that very week, such gold-stock and silver-stock levels were truly fundamentally-absurd even with prevailing gold and silver prices. The very day of that bottom when everyone was panicking, I recommended buying AG along with 5 other elite gold and silver miners.
Remember that silver averaged $14.77 in Q4’15, and First Majestic still posted all-in sustaining costs way under that at $11.28 per ounce. So it was quite literally ridiculous for AG to trade as if this company was going out of business on January 19th when silver slumped to $14.03. Along with its peers’ stocks, First Majestic’s should never have been that low. Such fear was radically too extreme to be sustainable.
So a massive mean reversion higher in AG’s stock was inevitable, as I was pounding the table on for our subscribers in mid-January. And that’s indeed all that’s happened with First Majestic’s stock. While a quintuple in a matter of months sounds excessive without context, AG has only mean reverted back up to a mere 26.8-month high at best. This elite primary silver miner has simply regained already-low early-2014 levels!
Now if First Majestic’s stock had just quintupled to a major secular high late in a multi-year bull when extreme greed abounded, such blow-off gains would be a screaming sell signal. But seeing the same thing off major secular lows ludicrously defying First Majestic’s fundamentals when everyone had left it for dead is a radically-different scenario. Extreme gains off secular lows signal the births of major new bulls!
As you’d expect with a primary silver miner, First Majestic’s stock amplifies silver’s moves because they directly affect its profitability. AG’s gains and losses relative to silver’s over every major swing in recent years are highlighted on this chart, as well as AG’s leverage to silver prices and how long each swing took. Since silver-mining stocks are far riskier than owning silver itself, they must leverage its gains to be worthwhile.
AG has seen 6 major uplegs in recent years, but the last two were too anomalous to be considered as representative of average potential. In early 2015 AG surged dramatically while silver stayed flat, and of course in early 2016 AG mean reverted out of those secular extremes. Excluding these latest episodes of extreme upside leverage, AG averaged a healthy 2.7x upside leverage to silver in its recent bear years.
That’s pretty impressive considering the super-bearish sentiment plaguing silver and its miners’ stocks between 2013 to 2015 as the Fed wildly distorted the markets. Odds are AG’s upside leverage to silver uplegs will improve with investors’ sentiment becoming far more bullish. They will be looking for elite silver stocks to amplify silver’s gains, leading them to deploy more capital in AG than in the recent dark years.
And with First Majestic’s profitability already starting to explode with higher silver prices and higher gold byproduct prices lowering costs, this stock is destined to surge a heck of a lot higher on balance in the coming years. AG’s all-time high of $25.61 was seen in April 2011 as silver blasted towards $48 in a blow-off popular-mania peak not atypical for this super-volatile metal. AG’s potential going forward is far better.
During that peak Q2’11 quarter, First Majestic only produced 1.8m silver-equivalent ounces at cash costs of $8.32. That was a couple years before June 2013 when the World Gold Council first introduced all-in sustaining costs, so this superior metric was unavailable then. In Q1’16 First Majestic produced 5.1m silver-equivalent ounces at $5.00-per-ounce cash costs, 183% higher and 40% lower than around AG’s peak!
With vastly more production and much lower costs, AG stock should easily break through to major new all-time highs in the coming years as these new silver and gold bulls mature. So although buying AG above $10 is nowhere near as fantastic as buying near $3, great upside remains in this amazing primary silver miner. First Majestic’s incredible fundamentals point to massive profits growth in the coming years.
There’s one more little thing I’d like to share about First Majestic Silver that’s really cool. It actually sells its own mined silver in custom-minted First Majestic coins, ingots, and bars. I’ve always advocated every investor have a core portfolio foundation of 5% to 20% in physical gold and silver in their own immediate possession before ever investing in stocks. It’s wonderful to see First Majestic encourage physical investment!
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The bottom line is First Majestic Silver is one of the world’s greatest primary silver miners. It has built a fantastic portfolio of mining operations in Mexico, silver mining’s epicenter for centuries. First Majestic concentrates on producing silver at low costs, which enabled it to easily weather the severe testing of last year’s deep secular silver lows. It never faced any existential threat, despite what its low stock price implied.
First Majestic’s operating profits are exploding this year as silver recovers and mean reverts higher. Its already-low costs are plunging due to surging byproduct credits from higher gold prices. The near-quintupling in First Majestic’s stock in recent months is not only fundamentally-justified, but it’s likely only the beginning of a major new bull market likely to last for years. It’s not too late for investors to get deployed.
Adam Hamilton, CPA, is a principal of Zeal LLC, which he co-founded in early 2000 as a pro-free market, pro-capitalism, and pro-laissez faire contrarian investing and speculating Information Age financial-services company. Hamilton is a lifelong contrarian student of the markets who lives for studying and trading them.