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?