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I spent years going back and forth with Taylor Dart on Seeking Alpha. He is REALLY good at analyzing mines, but seems to forget that investors buy shares, not a calculator. I hate to admit he’s right with his analysis, a lot – IF you were a pension fund trying to de-risk an investment. As a RETAIL investor, you see Keith Neumeyer on the shows, and when the price of silver goes up, the first thing you do is buy First Majestic to ride that wave. I had been successful with this – once duking it out with him in November of 2021, only for a few months later I cash in my AG options for a $26,000 profit in one day. In this respect, TD was right and wrong at the same time. To be fair to the reader, I then gave this back with ill advised GDX/GDXJ/FSM/EXK options over the next 2 years.

So – while I disagree at TIMES with his analysis, he IS taking this from a big-boy seat of de-risking and seeking other things to invest in, in the sector. I do not think I have ever seen him say, “yeah, it’s a buy here”. First Majestic has always had a KN premium, but is this now in risk? I’d like to dive in here and talk about them here. This is not financial advice. It’s analysis on a mining stock company that I have held in the past, and am thinking about again. Do your own research. Speak with an investment professional.

Golden production

Keith has always been known by many of us as a “silver primary” producer. Many companies the last 3 years I have seen switch from silver as the “primary” to gold or base metals. However, all of these companies will refer to themselves as silver primaries. My biggest investment in stocks, by far, is Fortuna Silver Mines. They used to be a 60/40 silver to gold when I first looked at them, and by revenue, they will be closer to 20% silver and 70% gold, with base metals. I like them because they were massively undervalued and no one is tracking the gold story they have going on in the Ivory Coast. I love the story, and see them as an emerging junior gold producer with a strong silver kicker. I have privately tried to lobby the company to pivot their identity from FSM to Fortuna Silver and Gold. Or, Fortuna Precious Metals. I think it’s smart to have silver in the name, but when you do this, you insinuate that your company may overperform when silver goes to $50 or more.

In 2021, AG bought Jerritt Canyon, and with this, my recollection of analysis at the time by those much smarter than me was that it was near end of life, it was a private company, and the owners were selling to retire. There was a roaster involved, only one of three in Nevada. Apparently, the gold you mine in Nevada in a lot of cases needs a roaster in order to get to final production. The JC mine was smart in the respects that you get out of the Mexico-only jurisdiction, which has a $200m tax lawsuit against you and has harassed many other miners recently. It also helps to go to gold as a primary source of income, as silver prices don’t really allow for silver primary miners anymore. Check the graphic below I did a few months back on “primary silver miner” production, by revenue. One can argue that if the price of gold stays where it is and we see $30-$40-$50 silver, they will once again be a silver primary by revenue. However, with AG, even at $50 silver you are still a primary gold miner. I can’t blame them.

Now, my chart above isn’t perfect – I found some minor issues with things adding up to 101% or the like, thanks to Excel. But the chart/source I had I cannot find, so this will do. You see First Majestic as a 30% silver and 70% gold producer.

Dilution

Recently, I have seen criticism of share dilution of AG. I think you say the words “share dilution” and people cringe. Your piece of the pie shrinks. But, I’m going to discuss three scenarios here with share dilution. Spot which two are good forms of share dilution, and which one is bad. Hint: the third is bad

Scenario 1 – you are an explorer with 1,000 shares. Your market cap is $1,000. So each share is worth $1. You have 1,000 oz of gold in the ground. You dilute your share count to $2,000 to raise money to drill for a season. Your shares temporarily lose value to $.50. A discovery is hit, and you now have 100,000 oz of gold in the ground. The drill bit then provided the value to the dilution later by striking an ore body and defining the resource much bigger. This shows up on the balance sheet as an asset now. When you do accounting, you need to understand that Asset = Liabilities + owners equity (I errantly put minus before, thanks for the edit!). So when you add $1m to the Assets, and add nothing to the Liabilities, your Owner’s Equity then grows by $1m. While you now have 2,000 shares and not 1,000 – clearly you can see that each share right now could be worth $100. So through the power of exploration and raising money through share dilution, you now created additional value.

Scenario 2 – Company A has 1,000 shares and a market cap of $1,000. Each share is worth $1. They want to buy company B. They only have $100 cash on them. They issue 1,000 shares to buy Company B. The shareholder sees dilution immediately on paper as making the share they have worth $.50. However, Company A absorbed company B’s assets and liabilities. The combined company now has 2,000 shares, but the assets of the new company, combined with the old company, provide for $2500 in total asset value. They took on $100 of liabilities from the new company, so the owner’s equity is $2400. This implies now that the book value of each share is $1.20. So in this case, the synergies of the two companies combined helped perhaps to reduce redundancies and they can share facilities.

Scenario 3 – a junior miner is doing greenfields exploration. The company has 1,000 shares and the market cap is worth $1,000, implying a share value of $1. The company issues 1,000 more shares, temporarily diluting the stock to $.50. The drill results come back, and duster holes were hit. No additional value was added to the company.

Both First Majestic and FSM went through scenario 2 situations the last few years, and I wrote about this in great depth a few months back.

The risk that FM had was in the aging Jerritt Canyon. Is the resource depleted? Can they extend this through the drill bit? Can they reduce the costs of operations through more modern mining methods and equipment? I don’t know, but this is the result of what you are seeing with the dropping stock price. 2022 was not kind to FM so far.

You can see how the dilution of about 20% or so then doubled assets and revenues.

So…this was a brilliant move, with an asterisk. The bet here is, can KN turn it around? Those who bought stocks in and said “yes”, are getting baptized.

You can see the RSI is even lower than March 2020. This could imply that there’s a bounce here, but it doesn’t mean it would be anything more than a bull trap in a few days/weeks, as the price would then be sold off on a few points of profits by the pros. Right now, this is perhaps trying to catch a falling knife.

Ratios

I do, however, love value investing through looking at ratios. If you take a look at the silver to FM ratio, it is currently at 3.4. With silver now pushed back to just over $20, this implies that FM is being ground to dust. You can see at times, it’s down to 1.15 when silver goes crazy and people hop on the KN express. For argument’s sake, that would imply at $30 silver, FM could be $26 a share, or up perhaps 4.5x from here.

So for me, I then look at – how far lower can it go? I think the pros right now want to see JC solved before they get back in. But people like you and me who live mining stocks would buy the hell out of this at $6, watch it go to $3, buy twice as much, and then wait for it to go to $12 to $15 on the next silver strong move up.

However, while there is a tasty 4.5x upside, it does imply to dip my toes in here. But I think I’m looking for price to go lower, and wash out a lot of the options people. I had looked at options 6 months ago, and they were grossly inflated. Someone took those bags and ran with them. I can see FM dropping yet into the $4.x range even as silver could hold par here for a bit. The fear of recession is an albatross around silver’s neck at the moment, and many of us simply are waiting for gold to hit it’s bull flag bottom of wave 2 before it takes off here on a massive wave 3 up. Now, is that bottom $1800, $1775, $1675, or $1500? No one knows. It could be today, it could be months from now. But – we watch for signs of a turnaround.

With this, you have First Majestic with no real catalyst for good news. This could imply further selling in the days, weeks ahead and may only stop when silver comes back to life again. The problem is, it’s only 30% of their revenues now. With JC and gold dominating their income, a further slide in gold price makes reality even harder for a miner squeezed. They have cash and access to a credit facility, so this is an experienced sea captain navigating some perilous waves more so than any kind of threat to their existence – at this point.

Value

As a value investor, it does look interesting to take a bite here, but it’s also rolling the dice that in the next few days/months you will see some announcement that JC issues have been solved AS you see gold start to move back towards $2000 and silver towards $25. All three of them can happen – in the next 1-2 weeks, but probably not before share price drops even lower on no news and shorts having a field day with lack of buying.

However, since Endeavor Silver and Aya to me are much better silver pure plays, I think these get a lot of attention of the rabid silver fans on silver price moves. For me, EXK options look really good – the problem you have with them is that I’ve read that they aren’t profitable until $24 silver. So these guys are a gamble if silver is going back into the teens anytime soon. My bet here is $20 holds, but that is a guess. It doesn’t mean they cannot have a flash down to $19.50 and a reversal. So for me, EXK options are something I might be able to get more value on than AG options. However, if you remember silver squeeze, AG had a form of short squeeze. Remember all of the shorts I mention above? If silver takes a $1 move up in a day, you can bet you’re going to have a short squeeze, and THAT might be your options play here. Get in dirt cheap at $4.x, and wait for a strong silver move and retail to jump on AG, creating a squeeze, get the hell out of the options play for a 2-3x.

EXK options might be something I look for with a longer hold as I don’t see them moving as violently as a short squeeze with AG.

Also on the plate is Discovery, who I have owned off and on since 2020 or so. Discovery has a PFS out with about 40% of the reserves on it, and they have a new PFS they will release towards end of year. The danger here is the $22 silver price they use. If silver somehow stays rangebound the next 1-2 years between $20-$22, I can’t see how this project is advanced. However, my bet, along with most of you, is that we see a much higher silver price, and soon. Discovery is something I cannot buy options on with my broker, but I have a standard position with them.

The last 2 years, most of my free cash has gone towards rehabbing one of my units, and I’m now done with that and seeing nice FCF. I had used a lot of my 2020 profits I took to initiate that project (I made a small fortune on the move up to July 2020), so I will start to be more of a player again with miners as they are all beaten down and I have strong ability to invest more now. I am also stacking soon in KAG with Kinesis, so I will be playing the physical silver in a vault along with the miners.

I love KN and FM, but I’m in watch mode. If I see another 10-20% drop, I cannot help but to look to get in and accept a 50% downside from there for a perhaps 3-5x upside on a strong silver price move up.