Why Silver Supply Cannot Respond to Higher Prices | Keith Neumeyer

Key Concepts

• Silver & Gold Price Surge: Significant price increases in both silver (exceeding $100/oz) and gold (above $5,000/oz) are driving substantial cash flow for mining companies.
• Mining Sector Valuation: Miners are currently undervalued compared to the physical metals, prompting some investors to shift focus to mining stocks.
• Strategic Metal Status of Silver: Silver is increasingly recognized as a crucial strategic metal due to its essential role in various industries.
• Supply Constraints: Global silver supply is severely constrained, with inventories declining and mining production flatlining.
• Shifting Market Paradigm: A new pricing paradigm is emerging for precious metals, moving away from the trading ranges of the past 20-30 years.
• Government Support & Permitting: Increased government support for the mining industry, particularly through streamlined permitting processes, is becoming more prevalent.
• M&A Activity: Anticipation of increased Mergers & Acquisitions (M&A) activity in the mining sector, potentially involving government participation.
• Importance of Management Teams: Emphasis on the critical role of strong, trustworthy management teams in mining companies for long-term investment success.

Vancouver Resource Investment Conference - Kitco News Interview with Keith Neumier (First Majestic Silver)

I. Market Overview & Price Action

The interview takes place amidst a significant rally in precious metals. Silver had recently surpassed $100 per ounce, peaking at $112, and was stabilizing above $100. Gold was consistently trading above $5,000 per ounce, potentially establishing a new base level. This price surge is translating into record cash generation for mining companies. The market is described as volatile, but the upward trend is undeniable.

II. First Majestic Silver’s Performance & Outlook

Keith Neumier, CEO of First Majestic Silver, expressed surprise at the speed of the price increases, noting that his previous prediction of $5,000 gold and $100 silver was initially projected for 2030. He attributes the positive outlook to several factors: safe jurisdictions, strategic mineral resources, and strong tailwinds in the market. The company is experiencing “over the top healthy” cash flow, benefiting both employees and shareholders. The company’s minting operation, initially established to address supply chain frustrations, has become a significant revenue stream.

III. Investor Sentiment & Market Dynamics

Neumier observes a lack of participation from large institutional investors (pension funds, mutual funds) in the precious metals sector. He notes a historical shift, where these funds were previously major shareholders but are now largely on the sidelines, potentially believing they’ve missed the opportunity. This dynamic contributes to the undervaluation of mining stocks compared to physical metals. Rick Rule’s strategy of shifting from physical metal holdings to miners is cited as an example of recognizing this undervaluation. The cyclical dips in silver, with intraday volatility reaching 12%, disproportionately impact silver miners. Neumier believes investors still don’t fully believe in the sustained price increases.

IV. Supply & Demand Fundamentals

A key concern highlighted is the constrained supply of silver. Global silver inventories have decreased by 35 million ounces (according to Ed Sears’ report). Mining production has remained flat for a decade, around 830-850 million ounces. This supply shortage is exacerbated by the lack of new discoveries and the high capital costs associated with developing new mines (estimated at $1 billion for port construction, roads, and milling facilities). The strategic importance of silver, described as essential ("without silver, nothing works"), is emphasized, contrasting it with copper ("copper's highway"). Backwardation in the COMEX and Shanghai markets further underscores the tightness of supply.

V. Government Policies & Jurisdictional Risk

Neumier notes a positive shift in government attitudes towards the mining industry, crediting both the Trump administration and current initiatives in Canada (Carney) and Mexico. He emphasizes the importance of government support, particularly in streamlining permitting processes, which can be a lengthy and costly undertaking (First Mining’s Springpole project took over a decade to permit). He acknowledges past conflicts between the mining sector and governments but expresses optimism about increasing cooperation. Mexico, in particular, is becoming more supportive of foreign investment.

VI. M&A Activity & Investment Strategies

The interview anticipates increased M&A activity in the mining sector. Neumier cautions against government involvement in acquisitions, preferring government support through policy changes. He highlights First Mining as a promising company with two potential gold mines in development in Quebec and Ontario, anticipating production of 250-350,000 ounces of gold per year. Regarding cash deployment, First Majestic is actively engaged in M&A, buying back stock, and recently doubled its dividend. Neumier emphasizes the importance of evaluating management teams when making investment decisions, advocating for investing in honest and hardworking teams. He reiterates Rick Rule’s advice to be prepared to lose 50% on an initial investment and to average down during dips.

VII. New Pricing Paradigm & Lease Rates

Neumier asserts that a new pricing paradigm has emerged for precious metals, breaking away from the trading ranges of the past decades. He points to the disconnect between paper trading and the physical market, where supply is increasingly constrained. He notes the skyrocketing lease rates as evidence of this shift. He believes the physical market is now taking precedence over the paper market, a phenomenon he hasn’t witnessed in his career. First Majestic is using price forecasts of $3,200 gold and $38 silver for its financial planning, significantly higher than the $1,800 gold used by some major miners.

VIII. Notable Quotes

• Keith Neumier: “I think we’re in inning two [of the bull market]. Inning two is usually pretty stable.”
• Keith Neumier: “Without silver, nothing works.”
• Keith Neumier: “You know, if you make your first investment, be prepared to lose 50%.”
• Jeremy Safford: “You’ve been waiting for that moment in your career.” (referring to the shift from paper to physical metal dominance)

IX. Technical Terms & Concepts

• All-in Sustaining Cost (AISC): The total cost of producing an ounce of metal, including operating costs, capital expenditures, and exploration costs.
• Backwardation: A market condition where the current price of a commodity is higher than prices trading in the futures market, indicating strong immediate demand.
• COMEX: The Commodity Exchange, a division of the New York Mercantile Exchange, where precious metals are traded.
• M&A (Mergers & Acquisitions): The consolidation of companies through mergers or acquisitions.
• Strategic Minerals: Minerals deemed essential for national security and economic stability.
• Intraday Volatility: The price fluctuations of an asset within a single trading day.

X. Synthesis & Conclusion

The interview paints a bullish picture for precious metals, particularly silver, driven by supply constraints, increasing demand, and a shifting market paradigm. Mining companies like First Majestic are poised to benefit significantly from these trends. However, the market remains volatile, and investor caution is advised. The interview underscores the importance of investing in well-managed companies with strong fundamentals and recognizing the strategic value of silver in a rapidly changing global landscape. The increasing government support for the mining industry and the potential for increased M&A activity suggest a dynamic and evolving sector.