Monday, May 9, 2011

Finding Opportunities With Silver at $45

Three years ago, when silver traded at under $20 an ounce, I wrote about a small Canadian mining company. This tiny company was making a name for itself by extracting the precious metal from rich veins in Mexico.

Now, silver has risen to $45 and many investors are wondering if this metal has gotten too rich to invest in. Check out this three year chart which shows the price of silver surging.

Back then I wrote: "This Vancouver, B.C. based company has a slew of positive factors on its side, including growing revenue and production and falling operating costs, a stellar management crew, demand for silver that analysts predict will outperform gold in 2008, and current and future mines nested in the fertile underground of Mexico."

I was talking about First Majestic Silver (NYSE: AG; FR.TO), a stock that has risen nearly 10-fold since 2009 to become a $2.3 billion company.

You can pretty much change the '2008' to '2011' in that statement and it'll still be reasonably accurate, with one key difference - Silver Majestic has embarked on an aggressive program to become a senior silver miner and shed the junior moniker. CEO Keith Neumeyer has set the company's goal at annual silver production of 20 million ounces.

In the first quarter of 2011 First Majestic's stock climbed 46 percent. That's on top of a commanding 269 percent price gain in 2010. Bottom line - this has been an exceptional performer if you purchased shares essentially any time before this April.

The company (and shareholders) has enjoyed sustained gains primarily because of increased production.

The company owns three producing silver mines and is working on two development projects in Mexico. The oldest is the La Encantada mine, which the company has expanded several times in the past five years. Current production plans call for an 18 percent increase to 4.5 million ounces of silver in the form of Dore bars in 2011.

First Majestic has a cost advantage over other traditional miners because it works in Dore bars. Its final refining process is much cheaper than if it worked with raw ore, reducing costs by 80 percent.

The company just reported that in the first quarter its silver was 97 percent pure - it claims this is the highest purity level in the industry. It also reported that production rose 13 percent, to 1.83 million ounces, from the year before. Continued production growth powers higher revenues, and with $45 silver this company is manufacturing cash.

First Majestic's financials are impressive - it has $41 million in cash and no long-term debt. In 2010 gross revenue rose 85 percent to $132.2 million, net income rose 472 percent to $36.1 million, and silver production grew 72 percent to 6.5 million ounces. Those are numbers I can live with.

Even better, over this same period First Majestic cut production costs by 6 percent to $7.94 per ounce.

First Majestic adds an interesting twist for precious metal investors - the company sells silver directly to end-users via its website. Currently the company is selling nearly 40,000 ounces of silver per month through its Silver Bullion Store. CEO Neumeyer also has indicated that the company might start paying a dividend  in 2012.

Majestic Silver has experienced huge growth in the past three years as it grew to a multi-billion company. But there are ample opportunities still to profit from $45 silver, especially in the smaller companies. For instance, a silver miner that we recommended in June is now up 240 percent.

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