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

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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.

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).

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