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First Majestic Silver: More Upside Than You Think


Only lower silver prices can push it lower.

More upside potential than most people realize.

Economic conditions that make it attractive.

Strong management team, with a solid record of execution.

Profitable with low cash costs, and growing production.

Last week, someone posted an article on Seeking Alpha (First Majestic Silver Corp.: Valuation Up In The Clouds, But No Silver Lining) that claimed First Majestic Silver (NYSE:AG) is outrageously overvalued. They suggested it was going to crash 70-80%. I was very familiar with First Majestic and was a bit upset at the analyst's approach. They implied that the only reason First Majestic was valued with at $12 share price was because of relentless self promotion. They even made several references to the CEO's past as a stock promoter.

While promotion has always been a part of First Majestic's marketing strategy (and is common in the mining industry), that's not why the stock exploded in value in 2016. First Majestic is in fact one of the elite silver producers, with low cash costs (around $8 per oz.) and a pristine balance sheet with zero debt. It will produce about 12 million ounces of silver in 2016 with all-in costs around $15 per oz (free cash flow), adding to its $60 million cash balance. Thus, this is a very solid company, led by one of the best CEO's in the business (Keith Neumeyer).

I've followed this company since around 2005 and bought shares in 2009 (I still have them). Neumeyer has done an excellent job building First Majestic from scratch into a silver producing powerhouse that continues to grow. In fact, it plans to increase production to 18 million ounces in the next 3 to 5 years (see chart below). For this reason, not only do I have no plans to sell, but I expect to make a lot more money holding on to my shares.

Because of these facts, it is unlikely First Majestic is going to drop in price. The only thing that is going to push down its share price is lower silver prices. To get a 70-80% drop, you would need silver prices to fall below $14 per oz. I don't see that happening (although a drop to the 200-day moving average around $16 is possible in the near term). I expect silver prices to go much higher, and if I'm right, then you want to own solid silver producers, such as First Majestic. Here is why:

Yesterday was Labor Day, but America is hurting economically. We have a 62% participation rate for working adults. That is a 38-year low. Anyone who thinks we have a 5% unemployment rate is wearing rose colored glasses. It's at 5% because non-participating adults are not being counted as unemployed. Not only is the 62% participation rate a clear signal of economic weakness, but most of the jobs added the past five years have been of the lower paying variety. Thus, the strength of the economy has been getting hollowed out.

Non-farm payrolls have not been very good this year. The last report with more than 300,000 new jobs was in 2014. The most recent report, which came out Friday was 151,000. In fact, 5 of the 8 reports this year have been under 200,000. That is nowhere near enough to create growth.

New factory orders have fallen for 21 straight months. The PMI (manufacturing index) was 49 in August. It has been trending around 50 since Q4 2015. A number of 50 means we are not growing.

Consumer spending seems to be a bright spot, with 3% annual growth. However, when you strip out healthcare spending, there is zero growth. In other words, without all of those Obamacare premiums, which are really more of a tax than consumer spending, we have zero growth.

Shipping has been dismal. In August, Hanjin, the world's 6th largest shipping company declared bankruptcy. The Baltic Dry Index (shipping index) is around 700. In 2008, it was at 11,000. China's exports fell 4% in August. Japan's exports have been falling for months. Global demand has been dead. US heavy truck sales (big rigs) have been down significantly in 2016. US train traffic has also been down significantly in 2016.

Housing seems to be a...