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First Majestic/ Mining Finance

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I am interested in other peoples feedback regarding First Majestic Silver Corp. and First Mining Finance. First Majestic is a Canadian company, which is the second largest primary silver miner in Mexico. Mexico is the largest silver producing nation in the world. 

First Mining Finance is a "mineral bank". The company is only 1-2 years old. It's mandate is to acquire gold mines in stable countries, which have already established infrastructure. So the point is to buy as many properties as possible, while it is cheap. Then once gold gets higher into the next bull-market, open sell and open the mines, while holding residual interest and generating cash-flow.

The CEO and chairman of these companies is a man named Kieth Neumeyer. He has a track record of building billion dollar mining operations. He seems to be held in high regard within the PM mining community. 

I guess I want to know what the PM mining companies look like during market crashes or corrections? What is likely to happen as the demand for silver increases with industrial applications, but the price doesn't seem to rise with it? Won't primary silver miners be forced to stop operations or demand higher prices to justify producing mines?

Gold isn't my forte. So First Mining Finance is less understood by me. I understand the concept, but I suppose, not the real value of gold. The need for having gold as a store of value is not lost on me. But the need to mine a metal with limited uses, doesn't really make sense to me.  

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8 hours ago, aztecstargazer said:

The need for having gold as a store of value is not lost on me. But the need to mine a metal with limited uses, doesn't really make sense to me.  

It is mined because there is demand.  If demand or price crashes then the high cost mines will be forced to shutdown, leading to reduction in supply which leads to higher prices.

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Generally speaking, when you own shares in a gold/silver mining company you are getting two kinds of leverage. There is the leverage that comes from the fact that a small percentage increase in metal price leads to a bigger percentage increase in profit margin. The second is that if the miner is only barely profitable, or even unprofitable, at the current price, an increase in the metal price can push them into profitability and make an otherwise worthless company valuable. Companies that are unprofitable at the current price are sometimes called optionality plays and they are risky but can give good results if the price rises. First Mining Finance (FF) is a kind of optionality on steroids, because they are just acquiring assets and holding them until a higher price arises. The shares are highly volatile because whenever they make a new purchase, they fund it by issuing new shares, which dilutes the existing shareholders. As a shareholder you have to trust that the management knows what they are doing and that the purchases are adding enough value to offset the dilution.

First Majestic (FR) is a miner and is actually producing product. They got hyped quite a lot last year and the price went high and has settled down a bit. It didn't help when they had an accident and some miners were killed. The share price is still arguably a little on the high side, but if you expect silver to go up, it is one of the better managed miners. Depending on how large your portfolio is, you might want to consider diversifying into a few other silver miners as well, such as Pan American, SSR Mining, Hecla and Fortuna.

As you say, Keith N has a good reputation in the industry, though it does annoy me when I hear him being interviewed because he always trots out the line that the ratio of the price of gold to silver should be nine, because this is the ratio at which they come out of the ground. The two ratios are of course completely unrelated.

As to silver production, more silver has been consumed than produced for several years now, so either stocks are running down or a lot of recycling is going on. Despite this, the price hasn't gone up much. Keith did actually attempt to organise a kind of production boycott among miners in order to force the price up, but there was little enthusiasm from other miners, and he was threatened with a lawsuit for attempted price fixing.

As to what happens to gold/silver miners during crashes, this is a difficult and perplexing question. Sometimes, such as in 2008, they crash with everything else. At other times, they don't. Bear in mind that these days lots of market participants use high levels of leverage, either by using debt, or trading on margin accounts, or by using leveraged products. If there is a crash, they may be forced to sell everything they hold to meet a margin call, or to satisfy withdrawal requests from investors. My guess would be a panic sell across the board, but with metals and miners among the first to recover. This means you probably want to hold some cash in order to take advantage of distressed prices.

Usual disclaimers: this is not investment advice. I own, or have owned, FF and FR.

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