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The Low-Cost King of Silver

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Once the pending acquisition of Silvermex Resources closes, First Majestic Silver (NYSE: AG  ) will become one of my largest equity holdings. I could not be more thrilled by the prospect!

In the eight years since First Majestic purchased its first asset with the La Parilla mine back in 2004, this company has delivered a stunning record of growth execution and distinguished itself as the premier silver mining stock of this entire silver bull market. Over the past five years, the stock has comfortably outperformed even legendary value-generators Silver Wheaton (NYSE: SLW  ) and Endeavour Silver (NYSE: EXK  ) .

To its credit, First Majestic also bucked an unfortunate industry trend by handily outperforming the underlying price of silver over the same period. I sat down with the company's senior management team in Toronto earlier this year to discuss the secrets to their success, and I encourage investors to have a look. By tracking the miner's achievements carefully over time, I have grown tremendously bullish on First Majestic's prospects for continuing to generate substantial shareholder value over the long haul. The stock remains a top pick within my Motley Fool CAPS portfolio, and I will now highlight yet another rationale for my staunchly bullish stance.

At a time when the entire mining industry is battling some very acute cost inflation, even First Majestic saw its cash costs increase by 8% to $8.96 in the first quarter (as the La Encantada mine experienced some lower ore grades and mill recoveries). However, a look at the important production cost per ton of ore reveals First Majestic's stunning operational cost-efficiency relative to the competition.

First Majestic expended only $29.24 per ton of ore processed in the first quarter, representing an industry-trend-bucking 3% dip from the prior-year period. That achievement leads the pack by a huge margin, with Silvercorp Metals (NYSE: SVM  ) offering the next-best result I could find (among U.S.-traded silver miners) with a cost of $64.50 per ton of processed ore in its fiscal third quarter. And for all the negativity surrounding Fortuna Silver Mines' (NYSE: FSM  ) elevated costs at the Caylloma mine, it's worth noting that Fortuna's growing San Jose mine struck a comparatively lean operating cost of $70 per ton during the first quarter.

But nowhere in my review of earnings results from silver miners did I encounter anything even approaching First Majestic's low-cost achievement. First Majestic CEO Keith Neumeyer commended his team's performance, noting that the company's 3% cost reduction comes at a time when "many of our peers have experienced cost increases ranging between 25% to 50% per tonne."

First Majestic is busy developing the looming Del Toro mine into the company's largest mining operation, and potential stock catalysts may be imminent as the company releases an updated resource estimate and preliminary economic assessment over the coming weeks. Since this stock will soon become a core holding of mine with the closing of the Silvermex acquisition, I await with excitement the profound value-generation that's bound to result when a top-notch management team brings its proven operational efficiency to bear on yet another high-quality silver asset.

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Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Endeavour Silver, First Majestic Silver, Fortuna Silver Mines, and Silver Wheaton. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (9) | Recommend This Article (22)

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  • Report this Comment On May 15, 2012, at 7:58 AM, Bigplayray19 wrote:

    Christopher, you make very valid points on Motley Fool. I've read your comments for some time. The only point to add is silvercorp has 0 costs to mine. They make profits off the residual metals they mine. Lorne Waldman has talked about that on podcasts. So they have the cash flow to raise dividends. I think come late August all of the Silver miners will take off. I'm scooping up more because there is blood on the streets. They are being sold off heavy.

  • Report this Comment On May 15, 2012, at 12:20 PM, IlluminatInvest wrote:

    Cost per ton of ore processed doesn't really mean much, cost per ounce of silver produced is much more relevant, and SVM's cash cost of negative $5 is much more impressive than AG's positive $9/ounce.

  • Report this Comment On May 15, 2012, at 3:16 PM, tokelau wrote:

    Christopher, you must be near bankruptcy considering your holdings. You have my sympathy, but why do you keep promoting all those miserable stocks? At least take a break, because miners will only go down for some time to come.

  • Report this Comment On May 15, 2012, at 3:53 PM, hdotmom wrote:

    tokelau, you need to give the reasons you believe "miners will only go down for some time to come." It is easy to see a trend and make a statement but you should back that statement up. Why do you believe this? And I don't think you need to worry about Christopher, I think he has made plenty in the past to more than compensate for this little turn. I am sure his only pain is wanting to buy more! :)

  • Report this Comment On May 15, 2012, at 4:38 PM, tokelau wrote:

    Yes, there is a significant divergence between the price of gold/silver and the mining stocks, which lasts for years now. I wouldn't generally consider it wise to go against trends like this, whatever the reasons, but in the near future things will most likely get even worse, since the dollar is rising against the euro. Then the last place you want to be in is gold or mining, as the market is already proving. I am a longtime fan of the MF, but lately things are going wrong, the analysts are too stubborn in their opinions. I've never heard one say, maybe I was wrong or not exactly right about Thompson Creek, about Zipcar, Ford, Mako, you name it, no they stick to the same rants promoting the same stocks over and over again. It's getting annoying, sorry.

  • Report this Comment On May 15, 2012, at 10:01 PM, skypilot2005 wrote:

    Interesting Read:

    Bob Moriarty: A Contrarian's Guide to Volatile Markets

    Source: Sally Lowder of The Gold Report (5/14/12)

    ” TGR: You talked about calling silver's high last April, and you've again been looking at silver and gold assets around the world. Do you consider yourself more of a silver bull or a gold bull? Or neither?

    BM: I'm an agnostic. As for what I look for, I don't look for silver or gold or boron or natural gas. I look for opportunities. The Argentex Mining Corp. (ATX:TSX.V; AGXM:OTCBB) silver property we visited two weeks ago is a hell of an opportunity, and I said so.

    TGR: That's in the Santa Cruz Province in Argentina, which has been a hotbed of exploration activity over the last several years.

    BM: Yes, I was actually down there visiting four years ago. I liked the stock when it was $1.34/share. It's trading at about $0.38/share now, but two weeks ago it was trading at $0.25/share. If you're buying shares in silver at $0.25, you're effectively buying silver equivalent at $0.11/oz. If silver goes down to $15/oz, you're still going to make money.

    Argentex will release a new NI 43-101 any day now, and they've doubled the amount of drilling, so it wouldn't surprise me to see the resource almost double. But in any case, when silver was selling for $5/oz, there were silver company shares selling for $1/oz in the ground. So, $0.08, $0.11 or $0.20—that's pretty cheap for an ounce of silver.

    TGR: Do you look at certain jurisdictions or provinces that are particularly good for mining activity and then bet on some of those areas? Or is it always company specific in your view?

    BM: It's actually management-specific. You need to look at a lot of factors, of course, but the most important is management. The country or province is absolutely important. I'm going to write an article shortly and will call it "The Miners' Lament." It's about having a gold or silver or boron project and the price of the commodity goes up. As soon as the price goes up, governments get greedy. That's happened in Peru, Bolivia, Ecuador and Australia. To a certain degree it's happening in Argentina, because the government has started getting greedy and claiming a bigger piece of the miners' pie.

    TGR: On May 4, Argentina's Congress passed a bill to nationalize Repsol YPF SA (REP:BMAD), the biggest oil company there, expropriating 51% of Repsol's shares. Although not entirely unexpected because President Cristina Kirchner had announced her decision to nationalize YPF a couple of weeks earlier, the action—pretty much effective immediately—sent shockwaves through the resource investing community. Do you think this news makes investing in Argentinian juniors more risky?

    BM: There are a couple of different issues to address here. One is the stupidity of government in Argentina. In 1914, Argentina had the third-highest GDP in the world. Based on agriculture and metal wealth and the educational level of its people, Argentina still should be one of the wealthiest countries in the world. It's not, and hasn't been for 100 years now. The reason is 100 years of incredible stupidity in government.

    The resources are there. The people are there. The climate's wonderful. The wine's good. Buenos Aires is a lovely city to live in. Yet Argentineans suffer economically. For the government to seize YPF is especially stupid. The excuse was it was not making enough money out of it—in much the same way that the power company in South Africa wasn't making a profit because the government imposed limits on what the power company could charge for the power it sold.

    Governments believe they're smarter than the economy and they can repeal or modify the laws of supply and demand. They can't. The last 6,293 times governments have tried to show they're smarter than the economy, they've screwed it up. Governments just get in the way of people making money. If you go to Switzerland, you don't even see government. In Sweden, government's in the background and that's a welfare state. But, government doesn't figure into every newspaper article and everything you hear on the radio. In China, I don't have a clue how the government works; I just know it's an exciting place to make money.

    So let's go back to whether it's safe to invest in Argentine juniors. I think it is because the juniors are in the exploration stage and they're bringing money into the country. It would be especially stupid for the government to get involved at this point. I don't think it will fool around with the production companies yet, either, but there's no limit to the stupidity of governments.

    TGR: Santa Cruz Province in particular seems to be a fantastic jurisdiction for exploration—great roads, nearby power, supportive locals. I was impressed.”

    Annie Zhang, Octagon Capital Corporation (4/30/12) "Our Pinguino site visit reinforced our confidence in Argentex Mining Corporation. . .the project has infrastructure potential. . .and we were impressed with the technical team's excellent understanding of the Pinguino project's geology; our confidence with respect to the upcoming resource update and the extent of exploration potential has been reinforced."

    Bob Moriarty, 321gold (4/23/12) "Argentex Mining Corporation is selling Ag eq for $0.11/oz in the ground: If you want to buy some at that price, you had better buy damned quick. . .the project has two unique series of veins of different ages and different mineralization. It has an older, indium-rich, polymetallic vein system and a silver-rich, silver-gold series of veins. . .this company was cheap four years ago at $1.34 and the price today is simply stupid; if people want to throw their shares away for pennies, toss some pennies at them and enjoy a bargain."


    Official Web Link Assistant to Sinchi

    Long Argentex

  • Report this Comment On May 16, 2012, at 11:02 AM, XMFSinchiruna wrote:

    bigplayray and evanmacdonald,

    It's not so much that one metric is more important than the other, but rather than they illustrate entirely distinct elements of operations. Cash costs are indeed salient metrics, but variability between competitors is more a function of metallurgical content than comparable cost-efficiency. The per-ton metric, on the other hand, offers valuable and more comparable perspective on the structural efficiency of physical operations.

  • Report this Comment On May 16, 2012, at 11:43 AM, XMFSinchiruna wrote:


    I understand and appreciate your critique.

    I will freely admit that in a short-term context the current rout in resource equities has turned its fair share of my recent bullish calls in the sector upside-down in dramatic fashion. As a matter of fact, permit me to take this opportunity to express my deep sorrow for losses, whether realized or (preferably, I believe) unrealized, that many of my readers have no-doubt incurred.

    Speaking of Thompson Creek, I wish I had been blessed with perfect foresight into the severity of capital cost escalation that has battered the shares to its present levels, but it is a purely genuine belief in the value opportunity generated by the resulting selloff that keeps me expressing my long-term bullish outlook for the stock.

    And yes, given the impaired valuations that already pervaded mining equities prior to the latest pullback in pm prices, the sheer depth of this selloff relative to the metals price action has taken this observer quite by surprise.

    But in the long run, whether the bottom comes days, weeks, or even months from today, periods of weakness like this one provide the greatest buying opportunities within the long-term secular bull market that ultimately remains in play. I've done quite well with precious metal equities over these past several years. Some with a shorter-term outlook may consider it counter-intuitive to remain long these stocks through frequent and pronounced bouts of weakness, but I call it a rational adaptation to a long-term secular bull market characterized by major volatility in both directions.

    As hdotmom pointed out, you need not worry about me, though I thank you for your concern.

  • Report this Comment On May 16, 2012, at 10:24 PM, skypilot2005 wrote:

    On May 15, 2012, at 4:38 PM, tokelau wrote:

    "I wouldn't generally consider it wise to go against trends like this, whatever the reasons, but in the near future things will most likely get even worse, since the dollar is rising against the euro. "

    You need to take the next step.

    The dollar is rising because many are fleeing the Euro to the dollar. Not because the U. S. is in solid financial condition. Many just perceive it to be in better condition financially than Europe. That is not a reason to go long on the dollar. I. M. O.

    Ask why they are doing this? Is the Euro likely to improve? Etc.

    I am not going to take the time to explain the relationship between the price of gold and the value of the dollar.

    I recommend you “Google” it.

    Fool on.


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