First Majestic Silver Corp (AG)

First Majestic Silver Corp (AG) Valuation Up In The Clouds, But No Silver Lining: Kerrisdale

First Majestic Silver Corp (AG) Valuation Up In The Clouds, But No Silver Lining by Kerrisdale Capital

Also see Kerrisdale Capital Q2 Likes Brenntag, Check Point

First Majestic Silver Corp. is, in the words of its founder and CEO, “the purest silver company in the world,” with six operating mines and a handful of development projects, all located in Mexico. Like any miner, First Majestic has seen its market value fluctuate in sympathy with the price of its key commodity; from the peak of the silver market in 2011 to its recent low point, for instance, First Majestic declined 90%. As precious-metal prices have rebounded, however, First Majestic has gotten a new lease on life, rising 268% year-to-date – an increase eight times larger than that of silver itself.

This speculative frenzy – exacerbated by an ongoing, company-funded stock-promotion campaign – has gone too far: First Majestic’s valuation is now outrageously detached from reality. We estimate that the company trades at 5x net asset value (NAV) – an astonishing premium to peers and a gross violation of common sense. While the market prices other precious-metals miners at just 17% of the spot value of their measured and indicated mineral resources – gold and silver in the ground that still need to be extracted, processed, and sold over many years, justifying a large discount – First Majestic trades at a whopping 77% of this value. Not only is the company ludicrously expensive relative to its peers; it’s also expensive relative to its own history. For example, compared to the last time the price of silver was at its current level, First Majestic’s stock price is now 17% higher – yet its silver reserves per share are now 30% lower.

Indeed, as First Majestic has surged higher, even sell-side analysts with bullish views on the price of silver and the prospects of the silver-mining industry have expressed bafflement over its valuation. Among the eight firms covering the company, not a single one believes it’s trading anywhere close to NAV. But First Majestic has benefited from less sober investors seeking the cleanest “play” on a silver bull market and buying at any price.

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Contributing to the hype is First Majestic’s CEO, a former stock promoter who describes himself as a “high-level visionary” and for years has predicted – incorrectly – that silver would soon trade for over $100 per ounce (up from ~$19 currently). He has also opined that “the financial crisis of 2008-2009 was completely orchestrated and…known by the insiders” (as a way for banks to buy cheap real estate in “probably the largest theft in human history”) and contended that “if we actually do see negative interest rates in North America…we’re going to see riots.” While he argues that current precious-metal prices are unsustainably low as a result of “paper manipulation” by a conspiracy of big banks, what’s really unsustainable is First Majestic’s anomalously high share price, which we believe has 70-80% downside.

First Majestic Silver Corp (AG) – Investment Highlights

First Majestic is absurdly overvalued. Many lines of evidence point in the same direction:

  • The median sell-side estimate of First Majestic’s net asset value is 58% below its stock price.
    • Other large-cap silver miners don’t trade at similar multiples; to the contrary, based on sell-side figures, we believe the median silver miner’s price-to-NAV multiple is 68% lower than First Majestic’s.
    • This disconnect does not reflect some kind of quality premium for First Majestic; it’s a recent anomaly, only dating back to early 2016 (around the time First Majestic began paying stock promoters in cash and options for “digital marketing”1).
  • The value of First Majestic is driven in large part by the price of silver. Relative to the last time the price of silver was near its current level, First Majestic’s price per share is 17% higher – yet its silver production per share is 13% lower, its reserves per share are 30% lower, and its earnings per share are 33% lower. First Majestic was likely overvalued before, but now it’s become ludicrous.
  • Other silver and gold miners typically trade for less than 20% of the gross value of their mineral resources. First Majestic’s valuation is 5x higher – for no good reason.
  • First Majestic has had to write down several major mines in recent years, giving a window into what the company itself believes its assets are worth. Extrapolating from these values indicates that the company as a whole has 65% downside.
  • Using a simple, transparent DCF model that assumes that the company can mine as much silver as it says it possesses, at the costs it says it will incur, we estimate that First Majestic’s share price should be little more than $2 – 81% below the current price.
    • Even if we make the ridiculous assumption that the company possesses infinite silver resources, the downside is still 45%.
  • Even using a more complex, mine-level model with more generous assumptions, we find that First Majestic is still worth less than $2.50 per share, 80% below the current price.

First Majestic is heavily promoted. First Majestic’s CEO often describes himself (in the endless interviews he gives, many sponsored or funded by First Majestic) as a commodities investment guru, yet for years he worked as a paid stock promoter and “investor relations consultant” in the seedy world of small-cap Canadian shell companies; several such companies on whose boards he served shot up in price, only to quickly collapse and get de-listed. First Majestic and its sister company, First Mining Finance, also have extensive ties to a Panamanian brokerage firm now in liquidation after the SEC charged it with being involved in several pump-and-dump scams. (This same firm is now the nexus of a Canadian investigation into offshore insider trading by executives in British Columbia.)

Thus it comes as no great surprise that, after a precipitous share-price decline in 2014 and 2015, First Majestic enlisted the services of paid stock promoters to attract retail investors – an unusual practice for a multi-billion-dollar company. We document several such arrangements below. Adding fuel to the fire, the company’s CEO goes well beyond the typical level of miningexecutive optimism and pounds the table about how the price of silver will quintuple (notwithstanding nefarious, concerted efforts on the part of the world’s governments to keep it down) and how owning “good quality stocks” like First Majestic is the only way to “make serious money” betting on this move. We believe these unsavory antics help to explain why First Majestic’s valuation has become so inflated. But even a veteran stock promoter can’t put off reality forever.

Company Overview

First Majestic Silver Corp (AG)

First Majestic is essentially a roll-up – a collection of silver mines purchased from and initially developed by third parties, not discovered by the company itself. The story of how founder and CEO Keith Neumeyer came to create First Majestic – often described as his second billiondollar company2 – has been recounted during many of the dozens of interviews he frequently gives to outlets like SGT Report (short for “Silver, Gold, Truth” and, by its own reckoning, “The Corporate Propaganda Antidote”) and TF Metals Report (short for Turd Ferguson, the author’s nom de plume). Here’s one recent version:

Most mining-company executives have a background in engineering and geology. They work their way up the ladder. But that’s not exactly true for you. Is it true that you started out as a stockbroker? Well, I wasn’t actually a stockbroker. I actually worked on the floor of the Vancouver Stock Exchange for about six years. I started off working for the Vancouver Stock Exchange as a board-marker, of all things.…[Later] I actually arbitraged equities between Vancouver, Montreal, Toronto, and the Nasdaq as a pro trader.…When the crash occurred in…’87…a lot of the people that worked in the trading side of the industry got laid off as well as I did, and I started working for a couple publicly traded companies. And the mining sector, of course, as many of your listeners probably know – Vancouver is the highest concentration of mining on the planet, and me, a lover of rocks and a lover of math and business, it’s just natural for me to go down that path, so I put together my first company a few years later in 1992, which was First Quantum Minerals [a copper company with assets in Africa], which obviously became quite a success. …I left in 2000…I basically went into semi-retirement for a couple years. I didn’t really do much between 2000 and 2002. I dabbled in the high-tech market a little bit, but really nothing of any great degree. And when I saw the metals, particularly gold, bottom out in 2002, it was pretty obvious to me that the bottom was in and that things were going to start to improve, so I put together – I looked at actually putting a gold company together at first, but when I looked at the space I just felt there were too many gold companies out there, and I’d get lost in the space. … There were very few silver companies in the space. There was only really a handful, so I felt I could really build a good niche-type story.…I set on a path to create the purest silver company in the world, which we’ve done, and First Majestic today is the purest silver company in the world. And I achieved exactly what I was trying to achieve.

But this tidy summary obscures some messy – and colorful – details. For instance, Neumeyer first became involved with First Quantum as a stock promoter. In the words of one Canadian research analyst in 1995 (emphasis added):

First Quantum listed on the VSE [Vancouver Stock Exchange] in Sept/85 as Xenium Resources through an IPO packaged by a promoter who moonlighted as a belly dancer. Xenium was a “tight” deal typical of the VSE during the eighties. By the time it announced an RTO [reverse takeover] of a portable computer story in July/87, the stock had already reached $5 3/4. Those were the days when the VSE permitted trading to continue while juniors talked about fancy plans and vendors pocketed cash advances. By Feb/88 the deal had collapsed. In Feb/89 control shifted to Jimmy Lee’s Asiamerica group, which consolidated Xenium 2:1 to form Zeal Capital in Nov/89. Asiamerica handed the reins to Jason Woodbridge, who recruited Keith Neumeyer to promote the stock. Zeal connected with Donald Walsh and Frank Hogg who steered Zeal into the murky land of Russian beer distribution licenses. A shaky promotion was capped off in late 1991 by a deal to take over the St Petersburg brewery itself. This plan evaporated when the town council decided the brewery should be privatized by auction, not some backroom deal. By the time the stock hit $0.10 and Keith Neumeyer realized he was up to his ears in a major cow pie, everybody else had already vacated the stable. Neumeyer proceeded to reorganize Zeal, starting with a 4:1 rollback in June/93 to form First Quantum. He then waited 2 years before completing a private placement of 2 million units at $0.15 in June/95 (2M wts $0.15-0.18 2 years). One of the key placees is Clive Newall, now in charge of Kensington Resources and its diamond project in Saskatchewan. If he has any bright overseas ideas that do not fit Kensington’s mandate, First Quantum could become the vehicle.

In other words, Neumeyer only “put together” the copper-focused version of the First Quantum shell company after the Russian-beer-distribution version failed. Moreover, once First Quantum acquired real copper assets, it quickly became clear that Neumeyer was not a core part of the company:4 he stepped down from the board in 1997 to become “Manager of Corporate Relations”5 – a euphemism for investor relations.6 (Neumeyer also handled investor relations from 1992 to 1997 for a Canadian-listed firm called Offshore Systems International that sold maritime computer systems; the stock has since lost essentially all of its value and been delisted.

While the official First Majestic narrative frames the company as Neumeyer’s second straight triumph – conveniently omitting First Quantum’s prior murky history and Neumeyer’s lack of operational involvement – this story also overlooks the outcomes of his “dabbling” in two other public companies:

  • In November 1999, Neumeyer joined the three-person board of a shell company called Cosworth Minerals;8 he was soon joined by a “master glass technician” and a lawyer who had also served on the board of First Quantum during its shell-company days.9 Cosworth, whose shares traded for pennies, completed a reverse takeover of Palcan, a fuel-cell venture, in 2001. Neumeyer left the board in 2003.10 From the time he joined to the time he left, Cosworth/Palcan’s stock price went from $0.33 to a peak of $1.30 – and then back down to $0.23. It has since been de-listed after losing almost all of its value.
  • In November 2003, Neumeyer joined the board of Consolidated JABA Inc., a mineral exploration company (holding properties “without a known body of commercial ore”12) and early business partner of First Majestic’s. In September 2006, Neumeyer stepped down.13 From the time he joined to the time he left, Consolidated JABA’s stock price went from $2.52 to a peak of $3.36 – and then back down to $1.30. Today, after a reverse takeover by Perfect Lithium Corp. and a name change to Nano One Materials, the stock trades at C$0.54.

First Majestic itself had a similarly inauspicious start. Under its previous name, Vital Pacific Resources Ltd., it assembled a collection of mineral claims in British Columbia; Neumeyer apparently began to acquire shares during this period.14 In December 1998, he joined the board alongside two other new directors (a lawyer and an “investor relations consultant”).15 In October 1999, having failed to create any value from its mineral properties, Vital Pacific undertook a “transformation from a mineral exploration company, to a company committed to oil and gas exploration.”16 For years, though, the company accomplished little. Eventually it pivoted from oil and gas to gold, but, as Neumeyer later explained in an October 2001 letter to shareholders, “due to the continued dismal market conditions the Company was unable to raise funding to explore” several of the speculative gold properties in Manitoba it had made initial investments in, leading to a series of write-offs and a 10:1 reverse split.

In January 2002, Vital Pacific changed its name to First Majestic Resource Corp., with Neumeyer officially taking the reins as president.18 Neumeyer continued to tout the “good potential” of the company’s remaining gold properties,19 but by 2003 First Majestic had written those off as well.

It was only in August 2003 – more than five years after Neumeyer became involved – that First Majestic began to bet on silver, acquiring an option on the Niko silver project in Mexico.21 On the back of this development, the company began to raise capital and soon acquired an option on a second silver asset, the Platino Porphyry project in Argentina. In a breathless November 2003 shareholder letter, Neumeyer described these assets as “two exploration properties that exhibit elephant potential” akin to some of the best mining areas in the world.22 Yet, within less than a year, First Majestic wrote both projects down to zero, citing “unfavourable results from the exploration program undertaken to date.”

Indeed, of the 14 major silver assets that First Majestic has purchased in its history, all but one – Santa Elena, acquired just recently, at the end of 2015 – have either been fully written off or subjected to impairment charges, as shown below. (These impairments are all the more striking since most of First Majestic’s purchases took place more than a decade ago, at a time when silver prices were far lower, giving the operations an economic head start that they squandered.)

First Majestic Silver Corp (AG)

See full PDF below.

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