Silver prices are edging higher this year, although their gains are easily trumped by last year's drubbing in which the metal plunged 36% as the improving global economy encouraged investors to shun safe-haven investments in exchange for riskier investments with potentially higher yields.
The interesting point about silver is that although it is a precious metal, and therefore a safe-haven investment, it is also an industrial metal due to its prevalent use in everyday items. A variety of products, from cars to smartphones and iPads all require silver. According to The Silver Institute, in 2013 over half of global silver demand (54%) of silver went into industrial uses.
Gold, in contrast, is more of a "pure" precious metal. This year gold has edged up slightly, but prices are still relatively weak as an improving global economy continues to reduce investor appetite for the metal. Silver has largely tracked gold this year, perplexing many analysts who would expect the reason gold is under pressure (an improving global economy) would actually add some upside support to silver. So far it has not.
That being said, over the medium term, as long as the global economy continues to show improvement, silver will still likely outperform gold, The problem the silver market is facing right now is that with silver prices trading just above $21 per ounce, many miners are having difficulty churning a profit, that is, except for First Majestic Silver (NYSE:AG).
A miner that can profit when times are tight
First Majestic Silver easily topped analyst estimates in its full year 2013 earnings, pulling in CDN$0.56 per share compared to the Capital IQ compiled consensus estimate for CDN$0.32. In the first quarter of 2014 earnings were a bit of a disappointment. Revenue fell 3% year-over-year due to lower average realized metal prices. In the first quarter of 2014, the average realized silver price per ounce was $20.90, a decrease of 29% compared to the first quarter of 2013. Adjusted earnings per share came in at CDN$0.06, lower than analyst expectations.
Even though the most recent earnings showed declining revenue and profit, there were some strong metrics in the results that show the company makes a good investment even with low silver prices and a great investment for when prices recover.
First Majestic saw its all-in sustaining cost, AISC, per payable ounce of silver come in at $18.71 in the first quarter of 2014. The company is targeting an AISC of $15.87-$16.99 per ounce over the year thanks to the ramp up of production at the Del Toro and San Martin mine. This AISC means First Majestic can profit even with the current price of silver and could survive with even lower silver prices. Many silver miners are losing money at the current price.
First Majestic is preparing itself for the future right now by decreasing costs and conserving cash after expanding its operations. Commenting in the recent earnings, CEO Keith Neumeyer said:
After three years of aggressive capital spending to build and expand four of our silver operations, the company is planning to take a short breather to focus on treasury growth and free cash flow. However, given the low silver price environment focusing on further cost reductions and treasury growth continues to be management's top priority.
The company's expansion has markedly helped production. Just this week First Majestic reported that it had record production of 3,855,224 equivalent ounces of silver at its five silver mines in Mexico in Q2, up 18% from the same period last year. 2,801 ounces of gold were produced, an increase of 40% compared to the second quarter of 2013.
The future for silver
While it may not make sense to suggest a silver investment when the price of the metal is relatively low, the key to profiting in a commodities-related investment is timing. To make the most money you need to buy in when prices are low.
We saw in the last economic cycle that when commodities prices rallied investors were willing to pay top dollar for miners. For example, when silver prices were high, people were willing to spend almost $65 a share on First Majestic stock. Those who bought First Majestic Stock in 2007 when the rally in silver prices was underway could have doubled their money if they sold at the peak. First Majestic Silver is currently trading around $10 per share – and with a strong longer term case for silver prices there is no telling what the stock will do when silver prices stage their recovery.