A Silver Stock For Every Silver-Bug

| About: First Majestic (AG)

Summary

Three are a lot of stories about the silver physical market but that is not why I am bullish.

Declining real interest rates are why silver will enter a new bull market and nothing else.

First Majestic is a great way to profit from the next silver bull market, it has great assets, low costs, and production growth.

The last article I wrote was about Uranium, but even though I am a uranium bull, that isn't the only sector that I think will enter a new multi-year bull market by the end of this year or by sometime next year. I also stated at the end of my last article, that I believe oil and precious metals will also start to enter a new bull market by the end of this year or by sometime next year.

Now most precious metals analyst think we are already in a new bull market for precious metals. That maybe the case, but as a contrarian, I am weary of that assumption, because so many gold bulls or goldbugs are now beating their chest. As a contrarian, I would proceed with caution, and continue a more prudent way of purchasing undervalued resource stocks, rather than just trying to buy every precious metals or resource stock that you can get your hands in the shortest amount of time because you are afraid of missing the first leg up.

In the past I wrote about a silver supply deficit that could be occurring, and I am very aware of the supply and demand stories about silver that are being floated around. But this isn't the reason that I am bullish on silver. When it comes to industrial demand, I believe that when the price of silver starts to rise, entrepreneurs will start to search for cheaper alternative metals, so they can lower the cost of production when it comes to manufacturing its products. In fact, one company is already doing that with solar panels, and that companies name is Natcore. In terms of a silver shortage from investment demand, I believe that story is a fabricated lie, and I even wrote about the silver shortage myth in the past.

Now the main reason I am a bull on silver is because I believe that there is so much debt in the system that the Fed will never normalize rates, and we will have real negative rates for an extended period of time. In fact, former Fed Chairmen Ben Bernanke has even publicly stated that during the next recession that the Fed should unveil negative rates, or at least consider using it. In fact, Janet Yellen recently admitted that negative rates could possibly come to the US. She has admitted that the Fed is studying the idea of negative rates, and the fact that she didn't shoot down the idea of negative rates is very telling to me.

Now I personally believe that when you're in an economic "recovery" and in the middle of raising the Fed Funds rates, that the mere fact that they are studying the effects of negative rates is rather strange. But the reason I think they are studying the effects of negative rates means only one thing and that is a recession is coming to the US, and what they are really thinking about is what they are going to do to combat it, not normalizing interest rates. That is why I believe negative rates are coming within the next year, and when that happens, the Fed will lower interest rates to negative nominal rates, and that will begin a new bull market in the precious metals sector.

This Silver Stock that will be a big winner in the next bull market

When it comes to investing in silver, I personally believe that every silver-bug should have exposure to the mining sector. How much exposure one should have depends on the size of one's portfolio, and their investing goals. If their goal is to profit, then their exposure should be mostly in miners, but if their goal is wealth preservation, then most of their exposure should be in bullion. You won't hear this from any other precious metals analyst, but I normally say it's good to own both, but if your portfolio is really small and your goal is to profit, then it is okay to solely own mining shares, and not have any bullion exposure. This is due to the fact that wealth growth, and not preservation, is your main goal.

Now when it comes to the mining shares, the silver stock that I am going to profile is First Majestic Silver (NYSE:AG). I believe that everyone that wants exposure to the silver stocks should have this silver stock in their portfolio.

Now when it comes to sources, I am going to use the presentation as a source instead of its numbers, because I believe its acquisition of Silvercrest has changed the dynamics of the company, thus making the Q3 financial statements incomplete.

Currently, First Majestic has 6 producing mines, all 100% owned by First Majestic Silver, with an average all-in sustaining cost of $13.36 per ounce. It currently owns the Santa Elena mine, which it received through its acquisition of Silvercrest. This mine has 2P reserves of 18.8 million ounces of silver and 295K ounces of gold, with an all in sustaining production cost of $10.95 per ounce of silver.

Another producing mine is its Del Toro mine, which has 2P reserves of 24.7 million ounces of silver, with an estimated all in sustaining production cost of $12.03 per ounce of silver. Its La Encantada mine silver mine has an estimated all in sustaining production cost of $12.52 per ounce of silver, with 28.4 million ounces 2P reserves of silver. Costs are expected to come down for the La Encantada mine, due to the installation of its natural gas generators that is estimated to be completed in 2016.

Its fourth producing mine is the La Parrilla mine, which has 20.4 million of 2P reserves in silver, with an estimated all in sustaining production cost of $10.38 per ounce. This mine is expecting further cash cost reductions, if you're not familiar with cash costs, its pure extraction costs of a mine.

Its fifth producing mine is its San Martin line, that has 18.3 million ounces of 2P reserves, with an all in sustaining cost of production estimated to be at $11.59 an ounce. And its last producing mine is its La Guitarra mine that has 9.4 million ounces of 2P reserves, with an all in sustaining cost $11.52 per ounce.

This is also a company were 69 percent of its revenue is derived from silver sales, and it's still only trading at roughly 7 times its cash flow. This is also a company that is estimated to grow into a 20 million ounce silver producer by 2020; currently it's producing roughly 16 million ounces of silver.

What I also like is the fact that it has a nice share structure of 168,850,606 of fully diluted shares. If you ask me, that is a nice share structure for a company that is on its way to becoming a senior producer. The only thing I don't like about this stock is that it's all in one country, and doesn't have geopolitical diversification.

But from a valuation stand point, most measures will not show this company to be undervalued, because silver has been trading below its all in sustaining cost of production. This is very common in the resource sector, but most companies' valuation will not improve until the price of the resource its producing improves. Thus increasing company profits, cash flow, and balance sheet strength. I believe this will be the case with First Majestic Silver.

The last thing I like about the company is the fact that management has skin in the game. Its CEO owns 3 percent of the shares, which equates to 3.3 million shares. This means that their interests are aligned with yours as a shareholder.

In 2011, this company was trading at roughly $24 per share when it only had 3 producing mines. Now it has 6, with 3 more expected to come online by the end of the decade, imagine what this company can be traded at during the next bull market in silver.

In conclusion, this bear market in resources, while painful, has created enormous investment opportunities for all investors. If the energy sector (mainly oil and uranium) and the precious metals mining sector interest you, follow me on seeking alpha as I write about more companies that I believe will prosper in the next resource bull market.

Disclosure: I am/we are long AG.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.