By Mike Gleason
Coming up we'll hear from Keith Neumeyer, CEO of First Majestic Silver Corp (NYSE:AG). Keith updates us on the state of the mining industry, how ridiculous and ultimately damaging the futures market has become, and why he believes the possibility of triple digit silver is NOT ridiculous. Don't miss a fantastic interview with Keith Neumeyer, perhaps the most outspoken leader in the entire precious metals mining industry. But first, this week's market update.
Precious metals markets are rallying strongly and showing signs of breaking out on the charts. Gold prices closed above the 200-day moving average on Wednesday, and on Thursday gold finished up at its highest level since last October. As of Friday morning recording the metals are retreating a little bit, gold prices are up 2.8% on the week to trade at $1,150 an ounce.
Silver prices meanwhile come in at $14.77 an ounce on the heels of a 3.4% advance this week. The rally caused silver prices to break out of a three-month trading range to the upside.
Also participating in the precious metals rally: platinum and palladium. The platinum market got off to a poor start in January, but this week's 3.4% advance puts platinum back into positive territory for the year at $904 an ounce. Palladium remains in negative territory for the year, but prices have been moving up this week. Palladium is up by 2.0% to trade at $512.
Metals got a boost this week from a falling U.S. dollar. The Dollar Index plunged more than 3% as doubts grew about the Federal Reserve's willingness to raise rates at all this year. New York Fed President William Dudley noted that deteriorating financial conditions would weigh on the Fed's next rate decision in March. More and more players see the Fed's recent moves as a "policy error," and a consensus is forming that the central bank will stand pat next month rather than hike rates. In fact, futures markets suggest the chance of any hike this year are now less than 50%.
It's conceivable that the Fed's next move could be to follow the likes of Europe and Japan down the path of negative interest rates. With an election approaching, the Fed will be under pressure to stimulate the economy - and negative rates may be all that Janet Yellen's crew know to do if the stock market is crashing and economic indicators are turning down.
Mike Gleason: It is my privilege, now, to be joined by Keith Neumeyer, founder and CEO of First Majestic Silver Corp. One of the top silver mining companies in the world.
Keith has an extensive background in the resource and finance sectors, and has been an outspoken voice about concerns that there is some level of price suppression going on in the silver futures market. It's a real privilege to have him on with us today.
Keith, thank you so much for joining us, and welcome.
Keith Neumeyer: Well thanks, Mike, I appreciate your time.
Mike Gleason: Well, there's so much I want to ask you about, so I'll just get right into it now.
As we're talking here on Thursday, we're seeing a continuation of a modest but positive price action in the metals. A rally seems to be a long time coming here. I'm sure it's a welcome sight to folks like you. We'll see if it ends the week on an up note, here, and if the rally can continue.
I want to start out by asking you about the futures market, which you have been openly critical of. There is some concern that exchanges, like the COMEX may be impeding discovery of the true market price for gold and silver. There have been many examples of games being played. You've got huge sell orders being dropped on the markets in the middle of the night or during other periods of low liquidity. Then, you have banks actually admitting to rigging the London Fix and sticking it to their own customers.
The evidence piles up, but regulators are turning a blind eye. If prices for precious metals are being suppressed, it's producers like you who are harmed. It doesn't seem like it can go on forever. So how do you see this ending for the COMEX, can it be reformed, Keith? What are your thoughts there?
Keith Neumeyer: Well, it is nice to finally see the metals moving over the last two weeks, actually. We're now a month into the year and it's been a pretty good start for miners. Hopefully it does continue through the next several months.
Interestingly enough, as you probably know, we saw two fixes in London, one last week on Tuesday, I believe it was, $0.85 below spot. That's the first time that's ever happened. I talked to our traders, who trade in metals, and it's completely unexplained. There was a couple of news articles that showed up and, of course, the banks who are behind this Fix have been completely silent on the fact that this has happened.
Then, the next day, on a Wednesday, the Fix was $0.10 below, which is obviously a lot less of a big issue, but it's still below the spot. The Fix is $0.10 below the spot. Two days in a row we had a Fix that was below spot prices, which has gone completely unexplained to all of the suppliers.
Fortunately, First Majestic doesn't have a lot of its product that is affected by the Fix, because we produce most of our silver in the form of doré bars. Our doré bars are based on spot on days that we decide to sell our metal. But we do produce some of our silver in the form of concentrates. And those concentrates are affected by the Fix, which is unfortunate.
Some mining companies, who have 100% of their production, for example, based on their Fix were very dramatically affected. It's not the COMEX, this is the London market, obviously. But it's all the same. These are the same players that trade in the COMEX, the same players that trade in London, trade on the LME and trade in this market, they trade on these prices. It is completely contrary to general market forces.
My issue with the COMEX is clear. I've said, quite honestly, "create a system, whereby, they have to have a system in place where they can go 100 times what's in the vault, for example". We have a fractional banking system, we know it's there, but they can sell unlimited ounces in the form of paper and there's no limit. All I am saying is create a limit whereby the banks can sell 100 times what's in the vault. I'd prefer it much less. I'd prefer it 10 times, but that's probably unrealistic.
But right now, when you can trade a billion ounces a day, and the miners are only producing 800 million ounces a year, that system, in my view, is broken.
Mike Gleason: Yeah, more ounces traded on paper in a single day than are produced globally in an entire year. It's truly mind boggling.
Keith Neumeyer: Yeah, that ratio is nuts.
Mike Gleason: Yeah and it seems totally unsustainable. I would think something will have to give at some point.
You've purposefully held back some of your production because you would rather hold some the silver on your balance sheet rather than trade it for cash. You've called on others in your industry to do the same. Basically saying, "Let's not let the market have our silver until something changes with the price-setting mechanism for our product."
Are you getting any traction on this, Keith? I know that many miners might not have the financial strength or available cash, at this point, to hold back some of their production. But do you see others following your lead on that?
Keith Neumeyer: Well, of course all of the miners are in stress right now. But I'm not asking for a big deal. For one month's of production, for us, First Majestic, we're a small player in the whole scheme of things. We produce 18-19 million ounces of silver, which is a big number. Of 800 million ounces that are produced in a year, that's a small number.
I was actually in New York just a few weeks ago and I was surrounded by a number of executives at a dinner. I quite clearly stated in the room, and there's about 30 people around the table, 20 or 30 people around the table, and I said, "Look, let's take a month. Let's hold back our production in June of 2016." I can tell you, everyone in the room could afford to do it. We could afford to do it. We would still be producing. Everyone would still be working. We just simply wouldn't sell our silver.
Now, again, this goes back to the concentrate sellers. It's more difficult for the concentrate sellers to do it, because they have contracts in place. They have to deliver their metal into these contracts. Their ships pick up the metal, their concentrates, and goes into the different smelters around the World. It's a little bit more difficult for them.
If you're producing doré bars, it's a lot easier for those doré producers to do exactly what I've asked them to do. I didn't get even a single taker at that dinner. I was very disappointed.
Mike Gleason: Yeah, that's definitely a shame to hear. But hopefully those other guys will start to recognize that it's going to be important for them to do something versus sit idly by. At some point, you would think that it would make economic sense for them to have, maybe, some short-term pain on the cash flow just for the long-term good.
You still have some hope there?
Keith Neumeyer: Well, look, I think it would send a message. Unfortunately, a lot of mining companies don't understand what they're selling. They take the rock under the ground, they produce the metal, and they're happy with it. They don't understand the monetary nature of the product they sell.
I think the mining companies should get together, put their foot in the sand, and say, "Look, enough is enough. We're not going to deliver metal to the banks for 30 days."
Personally, I think maybe it would be a cosmetic stance by the mining companies, but it would tell the banks, it would tell the world, that we're fed up. I think it's important.
Mike Gleason: The recent price increase this week, notwithstanding some good news for the mining industry, I would think has been the falling price of oil. How has that affected or benefited your business, Keith? How much has it helped reduce your all-in cost of production?
Keith Neumeyer: Well, in Mexico, it's a little bit different. I think outside in Mexico it's probably helped the miners a lot more. The price in Mexico is set by the government. The producers in Mexico, not just the miners, but industry, period, in Mexico has not had a benefit yet. Nor has the consumer... the regular fellow on the street who goes and guys gasoline still, today, is paying. Actually they're paying more for gas today than they did a year ago. They have not had any benefit at all. Nor have we had any benefit at all.
But the chemical costs have gone down. There are other inputs. Of course, I was responsible for other things. Transportation, chemical production, and so on. The actual price of diesel is actually higher today. That changes, mind you, in January 2017 when the price for energy and the principal on gas in Mexico does float to world standards.
We are looking very much forward to that day, January 1st, 2017, but we haven't seen the big impact, yet.
Mike Gleason: What's the current state of the mining industry? Obviously, it's been a tough slog given the bare market we've been in for the last four plus years now. I guess, First Majestic, you guys have been maybe able to adapt better than most, but how's the industry doing, Keith?
Keith Neumeyer: (laughs) Your listeners need to be told? I think all they have to do is look at our portfolio, but it's been tough. I've been in this business for 34 years. I've seen lots of ups and downs. This particular down cycle, we're five years into it, a lot of the juniors are hurting. We've seen mines close around the world. We've seen thousands and thousands of layoffs.
In our case, we've laid off 1,500 workers. We had 5,500 employees at the top of our business. Today, we have 4,000 employees. We're actually producing more silver today than we did when we had 5,500, so I guess we're more efficient as a business.
You know, Mike, I guess this downturn has allowed us to improve our business quite dramatically. We've brought in automation, a lot of innovation projects. We've done a lot to our business to improve what we do, how we produce metal, how we produce silver, obviously. And it's been good.
We've taken advantage of this current environment. I think we've improved the business dramatically. We're now profitable at these metal prices, which we were producing metal at a much higher price a couple years ago. So I think it's been exciting from our standpoint.
But it's been tough for some other miners. For us, First Majestic, is quite a flexible company. We're not bound by contracts or contractors. We, fortunately, own all of our own equipment and we have all our own talent base and talent pool. So we haven't had to outsource and so on. A lot of the other companies who didn't, in the heyday of the bull market, go out and buy all of their own equipment and buy their own talent, they're stuck with their cost systems or cost structures in place because they can't afford to make the changes to their business today that they would like to because the capital markets are closed.
These smaller companies that have different business than ours are really struggling. It will be interesting to see what happens here. Because if the metal did keep going...You know, we saw this in 2015, we saw this in 2014, where the first few months of the year are quite positive, and this does feel a little bit different, mind you. The start of 2016 does feel like this might be the beginning of another new cycle that could last several more years.
Time will tell. I'm not going to be calling this the next boom market, yet, but it does feel pretty good. Maybe the metal price will save some of these juniors, maybe not. I just don't know. Too early to tell.
Mike Gleason: Obviously, supply is getting constricted based on what's been happening. Now the U.S. is actually a net importer of silver, which is a recent phenomenon. We used to be a new exporter of silver here in the States.
Meanwhile, you have countries like China, in particular India, going on a silver buying spree. Are you seeing evidence of supply of fine silver getting tight in the global market? Because, if you look only at the current published price of Silver, it doesn't seem so.
Keith Neumeyer: Well, it's interesting that you say the U.S. is now an importer. I do know that. I've actually stated it a couple times. I'm glad you know that, because it's not a well-known phenomenon that's occurred, that's a recent event.
Production is dropping worldwide. I don't know what the 2015 numbers are, yet. I know Mexico is down 6% year-over-year. I've heard other countries are down, as well. Some the back-of-the-envelope numbers that I've seen out there, is the world production field has dropped somewhere around 10% annually. I'm waiting for confirmation of that number.
But we know that consumption is increasing. We know solar panel consumption is increase, other technologies. I don't think cell phones, laptops, iPads, automobiles and so on are decreasing to any great degrees. I think they're increasing. The use of the metal is still climbing and we're in a deficit. We're consuming somewhere around 1.1 billion ounces of silver annually. And the miners are producing, at least in 2014, they produced about 800 million ounces.
We still haven't seen 2015, but all evidence shows that that number is lower. This deficit that we're having is increasing. Silver is a much more rare metal than people actually realize. As a human race, we're consuming more silver today than we ever have. And above ground supplies are dropping substantially. I think we're going to have a huge supply squeeze in silver.
It's not showing up in price, yet. It will overtime. I'm confident with that.
Mike Gleason: That leads me right into my next question, here. Our mutual friend, David Morgan, goes through all the amazing uses and applications of Silver in his new book The Silver Manifesto. You just alluded to some of those. There are just so many and the list grows all the time.
Do you envision industrial users of silver, at some point, starting to maybe hoard the metal as news of dwindling supply starts to spread? This is something we saw with another one of the precious metals, palladium, about 15 years ago. It drove the price up, gosh, like 5 fold in a very short period of time, as automotive manufacturers snapped up all the palladium they could get over fears of not being able to get it for those catalytic converters potentially shutting down their automobile production line.
Could we see this kind of industrial hoarding panic occur in silver, Keith?
Keith Neumeyer: Well, I actually think there's a complacency. I think that the Sonys, Toyotas, Intels, you name it, Teslas of the world, who are big consumers of silver, just think that there's this abundance of the metal. I don't think they really have their eye on the ball at all. I think there is some smart money out there that knows what's happening.
You see the Silver Eagles, the 6 million ounces of Silver Eagles sold in January. And the buyers aren't retail. These buyers are commercial, sophisticated buyers. David Morgan eluded to who that might be, no one really knows. I think Ted Butler has also eluded who these buyers of silver is. There are people in the know, but it's not the whole industry by any stretch of the imagination, I think, that big consumers of the metal don't have a clue about the product that they need and their product that they produce on a daily basis. Because if they did, they'd be the buyers of this metal and it wouldn't be the banks or the sophisticated people who are buying this metal.
So it will be a very interesting field in the next year or so when the metal does get so tight that the big producers of electronics and other products just simply can't get their metal. Then, they're going to panic, then they're just going to, I think, pay whatever they can pay just to get it.
Don't forget, there are very small amounts of this metal in these components. If you're a producer of iPhones or Blackberries, you don't really care what this silver costs. If it's $100 now, it's not going to change the value of your iPad very much. It's just going to be a couple of dollars, which will be easily absorbed into the cost of the product. So they'll just pay whatever they can pay for it and it will be the sophisticated investor who ends up making the big money, I think.
Mike Gleason: Yeah, that, certainly when things could potentially go parabolic shortages beget more shortages, as they say. That would be an interesting phenomenon if it does start to happen.
Now, you've made a career out of profiting on buying value, buying near the bottom in the resource sector. What do you have to say to the guy who may be sitting on the sidelines right now? May have liquidated some things, might be sitting in cash, but considering putting some of that money into silver.
Is this a good time to be making a move into the metals? Or is it still maybe too early?
Keith Neumeyer: Well, for me, I like to buy mining stocks, because that's where your leverage is. I do own some physical silver and also physical gold, but most of my portfolio is actually in mining stocks, but it's tough to find good ones. Most people lose a fortune buying bad stocks in bad companies. It's just not in mining, it's in industries across the planet, obviously.
It's always hard to pick good companies in any sector. It all comes down to risk tolerance. I personally gauge this is the time to be buying these metals, but a good mining stock will go up 2-3 times faster than the metal itself.
If you go back and look at what happened to First Majestic Silver, when silver went from basically $10 to $50, the stock got up to $26 a share. The performance did outweigh the actual metal performance. That's very common, but it is difficult to find good companies. I caution your listeners to always look at management. Always look at what they've done in the past, how they've performed in the past, how they've done in the past, how have their shareholders done in the past by investing in their companies, and try to buy at the bottom of the cycle.
What I've done in First Majestic and also in my new company, First Mining Finance (OTCQX:FFMGF), is I buy assets at the bottom of the market. Then, in 2015, I bought five companies. In the case of First Majestic Silver, we bought one company called Silver Crest, adding our sixth producing mine to our portfolio and another 5 million ounce producer, which is now our biggest mine. I think we picked it up for basically...I know we picked it up cheap.
Then, in First Mining Finance, we bought 4 companies and built up a portfolio of 8 million ounces of gold there. Then, paying ridiculous prices for those ounces, as well.
This is the time to be buying assets, but at the same time, investors need to realize that mining is a risky business. It's volatile. It's hard to pick a bottom in any industry. Just pick good companies. Or, if you're less tolerant, just go and buy the metal and just be patient.
Mike Gleason: Well, as we begin to wrap up here, I know obviously pretty bullish on poor man's gold, as they call it. So as we begin to close, tell us why you're so optimistic about the future of silver.
Keith Neumeyer: Well, I think it's pretty easy, actually, because silver is way more rare than you think it is. There's an old number that was produced by Sir Isaac Newton when King Edward was creating the one pound sterling. And he came up with this in the 1500s, and they came up with the number 16 to 1, gold to silver.
So the question was, how many ounces of silver are there in earth's crust compared to gold? Sir Isaac Newton came up and said, "16 to 1." Okay, so that was kind of the number that has been floating around the planet ever since, and it's been gospel.
Interestingly enough, we're only mining 10 to 1. For every 10 ounces of silver, 1 ounce of gold is mined. Silver is way more rare than even we had thought it was 500 years ago and consumption is increasing every single year. The above ground supplies of the metal, you go back and look at what was above ground in the '80s, and there's about 5 billion ounces of 1,000 ounce commercial bars. That's down to just a billion ounces of silver that's accountable.
So we've consumed 4 billion ounces of silver in the last 30 years and it's gone. It's not coming back. It's not in recycle. It's in waste dumps, it's in the ocean, it's in stuff that will never be seen. Again, at that rate and as the consumption is increasing, and even if production stays flat, which it doesn't look like it is... but even if it stays flat, that deficit between mine supply is about 800,000 million ounces and that middle consumption 1.1 billion ounces is eating away at all of this above ground supply.
We're trading, right now, at 80 to 1, gold-silver. We're mining at 10 to 1, and we're in a deficit. How can that relationship last? We're going to have a radical compression, in my view, that's going to send the price...and I've said this 100 times... to triple digits. I know that at $14 or $15 silver that sounds stupid and it's probably hilarious to many people, but that's where I think it's going. That's why I put together a silver company 13 years ago and that's what I'm looking forward to and we'll see what happens. We'll see if I'm right or wrong, but that's what I think is going to end up happening.
Mike Gleason: Certainly would be nice to see true price discovery take place in the silver market. Some event may trigger that. When that does happen, those fundamentals, the fundamental case that you just laid out there, you think is going to finally start to take hold and silver is likely to shoot significantly higher when that finally does happen. It should move pretty quickly when it does.
Well, Keith, I want to thank you for sharing your insights and your firsthand accounts of what's going on in the silver mining industry. We really appreciate your time and your boldness when it comes to exposing what's happening in these distorted markets. We wish you all the best.
Before we go, please tell our listeners about how they can get more information on both First Majestic and also your new venture there that you spoke about, First Mining Finance.
Keith Neumeyer: Yeah, for sure. I'll keep pushing my efforts. I'm also on Twitter. The twitter @keith_neumeyer. And of course the companies, I'm the CEO of First Majestic Silver, it's simple, it's just www.FirstMajestic.com. And of course, my new company, which went public in April of 2015, it's www.FirstMiningFinance.com.
Mike Gleason: Well, thanks so much, Keith. I know you're traveling there in Europe and you took time out of your busy schedule to visit with us and we really appreciate it. I hope you have a great weekend. Safe travels. Perhaps we can catch up with you, again, down the road as this starts to unfold.
Keith Neumeyer: Thanks very much. I appreciate it.
Mike Gleason: Well, that will do it for this week. Thanks, again, to Keith Neumeyer, founder and CEO of First Majestic Silver Corp. Ticker symbol AG on the New York Stock Exchange and one of the largest, and most successful, primary silver miners in the world.