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Why This Reddit Silver Stock Plunged 13.5% in March

By Neha Chamaria - Apr 3, 2021 at 3:13PM

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First Majestic Silver's offbeat acquisition miffed investors, but it could be the precursor of major changes at the company.

What happened

First Majestic Silver (AG -0.68%) stock slumped 13.5% in the month of March, according to data provided by S&P Global Market Intelligence. That's a sharp reversal for a stock that gained 34% in the first two months of the year through February.

So what

First Majestic Silver's saga began in January when members of a Reddit discussion board started to pump the idea of investing in the stock and fueled a silver short squeeze rally. The frenzy even compelled a statement from First Majestic by the end of the month, stating that it wasn't "aware of any material, undisclosed information related to the Company that would account for the recent increase in the market price and level of trading volume of its ordinary shares."

The euphoria was short-lived though, as nervousness soon set in after the price of silver hit multi-year highs in February. Prices of silver, and silver stocks, started to cool off, with the trajectory continuing well into March.

A shocked man with a falling stock price chart in the background.

Image source: Getty Images.

To make matters worse, investors couldn't quite figure what to make of First Majestic's announcement on March 12 to acquire Jerritt Canyon mine in Nevada for an all-stock deal worth roughly $470 million, excluding share purchase warrants. The thing is, Jerritt is an all-gold mine.

For investors who are invested in First Majestic shares because of the company's exposure to silver and its goal of becoming the "world's largest primary silver producer," management's decision to acquire a gold mine was surprising. Management, however, tried hard to justify its rationale behind the impending acquisition, highlighting how it gave the silver miner headway into Nevada, and how it saw opportunities to extend the life of the mine, increase production, and reduce costs "substantially" at Jerritt.

On the positive side, Jerritt will be First Majestic's first mine outside of Mexico, so it reflects management's intention to expand the company's international footprint. Also, Nevada is one of the most sought-after jurisdictions for mining companies.

Now what

I expect First Majestic to pursue further opportunities outside of Mexico to diversify its revenue stream, especially after the miner's soured relation with the Mexican government because of an ongoing tax dispute. On top of the $260 million it was already demanding for 2010-2012, the Mexican government recently sent First Majestic another reassessed tax demand of $132.1 million for 2013. Those are substantial amounts, considering that First Majestic earned $23.1 million in 2020 and held cash worth $238.6 million as of the end of the year.

Although First Majestic is defending itself and also initiated arbitration proceedings in March, the risks remain. And that's something investors might want to keep in mind.

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