This week’s Interview of the Week is with Keith Neumeyer, President and CEO of First Majestic Silver. We discussed First Majestic’s strategy in Mexico, expectations surrounding the gold to silver ratio and some of the intricacies involved in the company’s acquisition of San Dimas.
Q: First Majestic produced 3.8 million silver equivalent ounces in 1Q18 toward a yearly target of 20 million silver equivalent ounces. How are you set to meet that target?
A: The acquisition of San Dimas will take us over this number. On an annual basis, we expect to be at approximately 30 million silver equivalent ounces by 2019. The company started to reinvest capital at the end of 2016, with 2017 being the first year in five that we increased investments in Mexico. Most of those increases went into development and exploration, as well as some property, plants and equipment. We hope this trend will continue over the next several years. This investment is being spread out over the company’s seven projects in Mexico and it will impact production in a very positive way in the next few years.
Q: The gold to silver ratio has averaged 1:47 over the 20th century; now, it is at 1:80. When do you expect a correction?
A: The mining ratio globally is 1:9. This means for every 1 ounce of gold mined, we are mining 9 ounces of silver. The ratio at 1:80 is quite exaggerated compared to the mining ratio, and every time we see a ratio climbing up into that range, we always see a correction. Last time it hit 1:80, the ratio subsequently fell very quickly to 1:30 and I would expect to see the ratio collapse again down to similar levels. I am a bull on silver and the company is growing quite nicely. Our production will grow substantially as a result of our last acquisition, so I think it is a good time for investors to look at owning our stock.
Q: Given that your strategy is to bet on one metal and one country, how does the acquisition of a gold operator’s portfolio change this?
A: When Primero owned the San Dimas mine, the stream agreement in place meant the majority of the silver went to Silver Wheaton (now Wheaton Precious Metals), while Primero focused on gold production. Now that the asset has been sold and the stream agreement has been renegotiated, we have incorporated both gold and silver streams into the agreement. Our strategy remains intact, and we are still focusing on one country and one metal. This will continue to be our strategy going forward. That being said, we do produce byproducts such as gold, lead and zinc, and these are sold directly into the market upon production. We have no hedging strategy even though the cyclical nature of the industry dictates that silver prices are bound to go low at some point. San Dimas is the largest gold-silver mine in the state of Durango and is one of the most important in the entire country. It is a mine we have had our eyes on for over a decade and, when it became available due to Primero’s financial status, we were able to evaluate the asset. Because the asset was already on our radar, we were familiar with its features so it was less of a decision over whether to buy the asset or not – for us that was an obvious decision. The question mark was over the renegotiation of the stream agreement with Wheaton Precious Metals. Under the prior streaming agreement, the mine was not profitable so the deal needed to be completely restructured. Luckily, Wheaton was willing to restructure the agreement and, when this was finalized, it was a matter of how to acquire the asset. It took around a year from when we made our first move to when the news was announced.
Q: What incentives is the state of Durango providing to continue investing in the state, especially as you are the state’s largest taxpayer?
A: Our ties with the government of Durango are close. It is a very mining-friendly government and we have noticed that it is always willing to engage in dialogue. We are in constant discussions with the government over a variety of topics that arise. Whenever we need government support, it is there to assist us.
This is an excerpt from the 2019 edition of Mexico Mining Review. If you want to get all the information, plus other relevant insights regarding this industry, pre-order your copy Mexico Mining Review or access our digital copy.