20 August 2012

First Majestic and Silver Speculation

A few days ago Ed Steer made this comment in response to First Majestic's 2nd quarter financial results:

... here's an interesting item from that report..."In addition to cash, First Majestic was carrying 574,000 PSLV (Sprott Physical Silver Trust) units at quarter end with an approximate market value of $6.65 million...and 100 Silver Futures contracts representing 500,000 ounces of silver valued at $1.7 million including the unrealized gain and the margin requirement. The Company is currently holding 150 contracts representing 750,000 ounces of silver at an average cost basis of $27.277."

750,000 ounces of paper silver? They mine this stuff...and buy paper silver? I'm sure that JPMorgan laughed with glee as they sold them the Comex futures contracts. You can't make this stuff up! It makes me want to sell my position in the company at the open this morning, but I won't
.

This drew the following response from their Investor Relations Manager:

Hi Ed – Hope all is well. Thanks for reading our news release yesterday, however, I’m honestly quite surprised to read your comment below in today’s G&S Daily

Mr. Neumeyer (like yourself) is a silver bull and employs the use silver futures to trade the volatility in the market. By utilizing some of the top physical metal traders in the world (whom trade approx.. 70% of the world’s silver market), we have access to valuable information. Furthermore, this activity is nothing new… for more than 2 years our shareholders have benefited from this activity. For the first half of 2012, First Majestic has realized a gain of $2.3M; 2011 +$2.4M; 2010 +$2.9M.

Quite frankly, I realize your issue is not with the trading activity; it’s directed at the use of Comex futures. Your concerns have been received and we always appreciate valuable shareholder feedback.

BTW - the use of stops are not practical for professional trading…

Can anyone explain to me the difference between the mindset expressed in this response and how the "banksters" and hedge funds operate? What is being described is speculation using other people's money, pure and simple.

We have no real appreciation of the risk of using futures, which after MFGlobal and PFG one would have to acknowledge has some risk of loss of one's margin associated with it - "concerns have been received" is all that is said.

But it is OK because they are trading off inside information of sorts from top traders and it has been profitable (so far)!

Basically what we have is a miner's silver flow being used as the base off which the CEO speculates on silver prices. It reminds me of Sons of Gwalia which failed due to a hedge book which blew up when production/reserves were not sufficient to meet the committments - the hedge book part of the business was far too big relative to the operations with little margin for error.

If Mr Neumeyer wants to speculate on silver I'd suggest doing it in separate vehicle like a hedge fund and keep the miner just doing mining. That way the performance of the speculation is clear for all to see and if it blows up it won't affect the ongoing mining operations.

Or am I just old fashioned?

23 comments:

Anonymous said...

Holy heck.

Anonymous said...

Seemed a bit strange... what I thought was even "odder" is the fact that they're holding Sprott's stuff, which trades at a premium.

In a slightly similar vein, I have heard / read about some bullion dealers who hedge their risk in this way. Not sure if my local dealer does it, but they move metal in bulk, have doubled their staff, and yet dumped 100s / 1000s of PM dragons for a lot less (spot price fell) than the purchase price 9 months earlier. Not quite sure how they manage this, but yet appear to be making a lot more money than previously - whilst maintaining very competitive prices. Hedging on the paper market?

Beer Holiday said...

I remember Pasminco blew up because of their hedging too.

Can't believe there using PSLV, where is Kid Dynamite...

Cottonbelt said...

'Or am I just old fashioned?'

… agreed, if I wanted exposure to bullion trading / speculation I would not do it via AG equity shares - it’s that simple from my investment strategy perch

Anonymous said...

Casino, plain and simple.

Anonymous said...

I am wondering if this similar to the late 1800's style syndicate that Jessie Livermore wrote about. Eric Sprott conspires with all of the producers (a relatively small space). They withold product from the market until the price reaches a level they feel it should be at. Not saying there is anything wrong with this, just commenting on the similarity.

Anonymous said...

Good thing I sold this dog of a stock!!

Unknown said...

There are two main scenarios that management is involved in with these derivative contracts and both of them bad.

One, they are using the derivative contracts to go long the price of silver and profit from an INCREASE in the silver price. If they are doing this then they are giving JPM and the other silver shorts ammunition (thier cash) to go ahead and short the silver price as any good investment banker would do. They are better off just holding production off the market and keeping it in the treasury which would (a) remove prod from the market and raise the price and (b) not allow the investment bankers to use their money to short the market

Unknown said...

Or scenario two, they are using derivative contracts to go SHORT the price of silver. This would be worse for shareholders because they would essentially be betting against their investors. Obviously I wouldnt be investing in a company that is actively shorting the silver market and profiting off of my loss.

Finally, I believe all this derivative action led to a multi-million dollar loss in the past quarter - so much for the "best" traders in the industry...

So either way this is a serious negative to AG and I personally am going to reduce my holdings in this position until management takes a more responsible approach to its idle funds.

Bron Suchecki said...

I think there is a case for a miner to hold any excess cash as phyiscal metal rather than dollars and sell the metal as they need cash for operational purposes. This way they maximise the long exposure to the metal for shareholders.

However, I don't understand why a miner looking to do that would hold PSLV or any ETF as the management fees on those are much higher than if they just stored the metal themselves in a non-bank wholesale custodian like Via Mat.

A miner is large enough to get a coporate account at a custodian and just cut out the ETF middleman.

Anonymous said...

I spoke to the Company spokesperson about this very issue.

Re: PSLV - I really did not need an explanation on this one. By parking some of their funds in this legitimate ETF, AG is effectively removing some physical silver from the market and thereby making things a little more uncomfortable for the price manipulators. As for the management fees and the premium that they are paying to Sprott, that is a small price to pay to shrink the physical market of silver. Also, the fee goes to Sprott who is doing most of the heavy lifting in terms of combatting the silver price suppressors.

As for the activity on Comex, I am still confused by the need to participate. However, what I do know is that AG is a top tier silver miner with possibly the best mining management team on the planet. When silver explodes to the upside, one would be silly not to have AG as a core holding in their portfolio.

Let's not be stupid here!

Bron Suchecki said...

Re the PSLV holding, it is an unnecessary price to pay to "shrink the physical market of silver" as a miner of their size could easily deal direct.

Consider as well that updating on this post http://goldchat.blogspot.com.au/2012/07/sprott-is-short-18moz-of-silver.html, PSLV's ounces per share have been diluted by 3% as the fund is still sitting on $41m cash. I calculate that to bring PSLV back to its pre-issue ounce per share of 0.392 the additional silver needs to be bought at under $24. So the dilution is looking permanent. This is about a $200k loss for First Majestic.

Why take manager execution risk and pay higher fees to basically hold physical silver?

I note First Majestic uses Northwest Territorial Mint for their bars, surely NTM could store 218,000oz for FM in its vaults a lot cheaper than the 0.6%+ costs PSLV incurs?

Graham Smith said...

Surprised at the (mostly) negative comments on this thread - clearly the market disagrees with you. To describe First Majestic as a "dog" of a company is way off the mark, you can sell your shares to me anytime. I don't have a problem with FM holding Sprott Physical Silver (in fact I have this one as well). Keith Neumeyer is the ONLY CEO of a major mining company to acknowledge price manipulation in the silver market.

Anonymous said...

I like Neumeyer, think he's right on his comments that the silver price bears no relation to reality right now, and is putting his money where his mouth is. Nevertheless, I am putting my silver money in AuRico and Allied Nevada. Will consider First Majestic if it drops more.

Anonymous said...

Bron -

Did you catch the news that Pimco has approximately $2.3 billion in gold futures contracts in their Pimco Commodity Real Return Strategy Fund? I know that being a long in the paper gold market, Pimco is supporting the price of gold, but how much better would it be if they took some percentage of that total and converted it to physical gold.

The price suppressors would be perfectly happy to have all investors in the paper gold and silver market. It would make their life a lot easier.

Justin said...

"surely NTM could store 218,000oz for FM in its vaults a lot cheaper than the 0.6%+ costs PSLV incurs?"

That would be an interesting comparison Bron, you should do it, there are several 'Sprotters' in your audience.

I'm also under the impression that PSLV 'stores' its PM's in 'bankster' vaults. Supposedly allocated but KD did write something along the lines of that, at least for a period, there is no guarantee your PM's are really there.

Bron Suchecki said...

If PIMCO wants to play leveraged gold then why do it on COMEX after MFG & PFG, better done directly with a bullion bank using forwards. Still have exposure but at least it is just direct with one counterparty under defined terms.

PSLV stores the metal with the Canadian Mint. Which is why it is even more crazy that FM doesn't deal direct. I mean RCM is a refinery, FM could send them dore for refining and then ask RCM to keep the bars produced on site at the same storage fee they are charging PSLV.

Justin said...

"PSLV stores the metal with the Canadian Mint"

Then we are back to your original point. PSLV is easier to speculate on PM prices with?

Bron Suchecki said...

PSLV easier to speculate with? No, a closed end fund with a varying premium to NAV cannot be better or easier than doing OTC trades.

Which also brings me to Paulson and Soros. I cannot for the life of me work out why they are investing in GLD when for that size they could deal direct with the bullion banks.

Justin said...

Paulson & Soros are chumps? Or at least they might be?

Justin said...

might be chumped, that is.

Anonymous said...

Paulson and Soros are anticipating an economic crash. They are preparing for the inevitable.

Best news source is Alex Jones infowars, Gerald Celente Trends research and Max Keiser.

Its time to get the head out of the sand and see the reality that is going on.

At this present time.
Gold has monetary value.
Platinum has commodity value.
Silver has commodity value.
Copper has junk commodity value.

Silver would have the biggest jump as it will go from commodity to monetary value.
Platinum there is not enough people who have knowledge of what it really is and will stay as a commodity.
Copper is just to heavy to haul around, but may have the greatest increase in value among all metals. Copper is still at the starting gate.

DH said...

Interesting point, Bron, on Paulson/Soros holding GLD rather than allocated metal through a bullion bank. If they were dealing with a BB, would they then not need to disclose the holding? Maybe they want to hold GLD because of greater visibility due to disclosure requirements. Then other investors say, "Paulson and Soros are buying gold; maybe I should buy some," resulting in a bump in the price.