Ask the Expert - Keith Neumeyer - January 2017

Transcript:

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Craig: Well, greetings again from Sprott Money News and sprottmoney.com. This is your Ask the Expert segment for January of 2017. I'm your host Craig Hemke and joining us this month is Keith Neumeyer. Keith is the president and CEO of First Majestic Silver and the chairman of First Mining Finance. And if you're not familiar with First Majestic Silver, they're actually the second largest silver producer in Mexico and one of the top five primary silver-producing companies in the world. So it's a real pleasure to get a chance to visit with Keith and ask him some of your questions. So, Keith thanks you so much for spending some time with us.

Keith: Well thanks, Craig. Good chatting with you again.

Craig: And again, these are questions that were submitted over the last couple weeks by Sprott Money customers, and I've got a handful of them. We had a whole bunch come in, so I've tried to combine some, you know, to try to get as many of these answers we can in the time that we have. So let's just dive right in. The first one, you know, we've got a new president coming in, in the U.S. on Friday, and he's talking about tariffs and border taxes and things like that. The first question deals with that, Keith. It says, "How might tariffs on Mexican imports affect silver producers in Mexico and the price of silver in general?"

Keith: You know, I don't think it really would have much impact on very much. I mean, look, Mexico is having some challenges right now for sure, you know, with energy prices so low. The revenue is going into...the government Treasuries are lower than it is or it has been historically. So, you know, they have gone after the mining sector, you know, we know that. I think everyone listening to this knows that the tax was brought into place back in 2014. We're paying that tax. It's just basically normal course. If you compare it to other countries around the world, Mexico is about in the middle when it comes to taxation industry. So it's a relatively low-cost country to be active in as a company. You know, with the peso the way it is, labor is extremely cheap. The peso is around 23 to 1, which is, you know, pretty good for us as our revenue is in U.S. dollars and 75% of our costs are in pesos. And the peso was about 12 to 1 just two years ago. It's now 24 to 1 or 23 to 1. So it's made a huge difference for us. So, you know, I'm not expecting much change in Mexico as a result of Trump coming in at all.

Craig: Okay, fair enough. Second question then, kind of also a global issue. Currently we're seeing on a daily basis almost a 10% premium for the price of silver in Shanghai versus the New York/London price. Is there a way that First Majestic can sell their silver there?

Keith: You know, I don't know of a way, quite frankly. You know, we deal with...most of our production is in dore bars. So we sell in the spot market, and I make that choice when I like what's happening in the market. We had a nice spike in silver over the last week or so, and we as a company, you know, sold into that strength. And you know, I'm always trying to get the best average selling price for our metal on a quarterly basis as fast as I can. And then I take advantage of these types of spikes in the market. I am a very bullish on the metal. I think the silver price is gonna go much, much higher. But, you know, we are a company. We need to sell our metal and then even though I hate selling silver at $17 per ounce, we obviously have to do it. But, you know, we sell...our metal goes to U.S. traders, U.S. buyers. And our metal is dealt with on the COMEX and not on other foreign exchanges.

Craig: Got it. Well, that's an excellent segue to another question that one of the readers submitted, Keith. And I think I'll just dive right into that one. As price rises, many mines from secondary producers come back online and the supply increases. So how do you, as a CEO of your company, manage this dynamic in getting the best price for your shareholders?

Keith: Well, yeah. It goes back to, you know, I guess the previous question. You know, if you go back, the company is entering its 15th year of business, well, it just has entered in 2017 its 15th year of business. So we've been around a while. And you know, if you go back since we've been producing, I think we beat the average COMEX price virtually every single quarter except, you know, there's a few quarters that we are a few pennies below the COMEX average. But generally speaking, we beat the COMEX average. And I do that by taking advantage of the market. My background is trading, back in the '80s, so I think I've been pretty good doing that.

But you know, the supply-demand fundamentals in metal are extremely favorable. I'm looking at, or actually, I'm thinking that silver prices are gonna go much, much higher. So, over the next few years, as prices go up, as I'm expecting they will, you know, more supply may come online, I don't know. But there's really no big silver mines out there that are gonna actually disrupt the supply that I'm aware of. A lot of the metal, a lot of the silver comes from base metals, comes from zinc mines, lead mines, and then so on. And there is a zinc-lead mine coming on stream the end of 2018. But it doesn't have any silver. So it's not gonna affect the silver market at all, so you know, I don't know. I don't see much silver, you know. I just see the demand for silver, you know, continually forcing a deficit. We've had multiyear deficits in the metal, and I don't see that changing at all.

Craig: All right, fair enough. You mentioned being subject to the whims of the paper market and the LBMA and the COMEX. And the next couple of questions deal with that pricing structure. As you know, there's currently one at least silver class action lawsuit that is making its way through the courts in the U.S. and moving into legal discovery. So this next question is, just wondering since you've been such a vocal proponent in putting forth the idea of these markets are heavily managed and manipulated, will you and/or First Majestic be joining any of these current class action lawsuits that allege silver price manipulation?

Keith: I think, look, I've been on the air talking about this. And, you know, I think that, you know, unfortunately, I think some people put me in kind of the quack category because of my vocal stance on what I believe is happening in the metals market. And it's not a matter of just me. I think the evidence is extremely clear. You look at the Deutsche Bank emails or text messages that were going on between the different banks about smashing down gold and silver and so on. I don't know why there's an argument on the other side that this stuff actually doesn't occur. But there's still people on the other side that claim that banks are not manipulating metals, which I always say I'm on the other side of that argument.

So, you know, I've spoken to the lawyers involved in a class action lawsuit. You know, just to be clear for your listeners, it's not a class action lawsuit yet. The lawyers are working to get it elevated to a class action lawsuit, and it could take another year to accomplish that. And with the Deutsche Bank news coming out, I think that it's gonna be very, very likely that the lawyers are gonna be successful in actually getting it moved up to that classification in the U.S. legal system. And once that happens, then First Majestic has put its name on the table and said, "Look, we will be part of that once you get it elevated." So we're on record saying that. I'm looking forward to being part of that. It's just a bit of a waiting game.

Craig: Yeah, okay. Well, and to that end, the next question is, within this current paper market structure, is there anything that can be done to increase the transparency of how silver is priced?

Keith: Well, you know, I tweeted an article just about a week ago. And by the way, people, if they wanna follow me on Twitter, they can do that, just keith_neumeyer. But it was an interesting article that came out on Seeking Alpha, and it was a WikiLeaks release, and they released an article or string of communication between the United States government and the UK government, which took place...I think it was 1970.

Craig: '74.

Keith: Or '74?

Craig: Mm-hmm.

Keith: Okay. And, you know, about creating the COMEX, creating the paper gold basically, creating the futures market. And it was quite interesting. It was very clear that they did it for the sole reason to try to dissuade U.S. citizens from buying gold. And I shouldn't have been surprised when I read it. But when I was reading, I was going, "Oh my God, this is like...we had the Deutsche Bank news just a month ago and now you've got this coming out. Like, what's going on here?" And, you know, obviously, when you're looking at the silver industry, and I guess we're talking more about silver than gold right now, but you know, we trade about one year's supply of silver in a single day in the paper market around the world, and that's ridiculous.

And then how does that actually occur? How does a bank just go and, you know, short-sell millions of ounces of silver in a single day when they don't even have the delivery? They just do it, and then they do it in collusion with others, and you know, it's quite shocking. So I think that we have to dismantle the entire process, and I think that's you, in this interview, it's me, you know, talking about it. And it's other executives of the mining industry hopefully coming forward. You know, it's only gonna be accomplished from media like this and us speaking out because the rules and regulations are on the books. It's there. We don't need any more rules and regulations. What we need is the regulators to follow the rules and regulations and force the banks to follow the rules and regulations.

Craig: That's a tough one, no doubt about that, and I know you've been banging your head against that wall for years as well. And that actually is a segue into the final question that we have for you, Keith. And it is, will there ever be a day when these paper markets fail to deliver? Because that might be kind of a force breakage of what you've been talking about. If so, if there is that day ever coming, will you be able to see it coming? What signs do you think would be present that some type of delivery failure is imminent?

Keith: Well, you know, I feel like a bit of a broken record, but look, it's already happened. It's happened several times. You just don't really see it happening. There's no rules in place that force the exchanges to deliver the metal to you. It's a paper instrument. It's cleared, or it's in U.S. dollars, and then if you have a profit or loss in that, you get paid out in that currency, and that's simple as that. So if you call for the metal, you may get it, but it's very difficult. You have to pay a fee for it. They make it tough for you to call metal off the COMEX.

So you can do it, but if there's a run on the COMEX, if there's, you know, multiple people asking simultaneously for the metal, they can just simply deliver you cash. They don't have to deliver the metal to you. So it's right in their rules. It's in their guidelines, and so I don't know. I think the solution is really mediums like this where we have to point the people at situations like this because we know, I think, you know, people that have been watching this market for the last decade or so, we know, that there's been manipulation in currencies. We know there's been manipulation in, you know, the bond market, oil and gas, and the metals and so on so forth. And we just have to point the governments, point the regulators.

And you know, look, we're going through a sea change around the world, you know, with Trump coming in. You know, I'm hoping he doesn't fall into the same malaise that other politicians fall into once they, you know, take their titles as president. Because it seems a lot of these individuals, you know, they talk a big story and right when they take their seat, then all of a sudden everything changes and they go back to what everyone else has been doing. So I'm optimistic that Trump's not gonna fall into that, and you know, we've seen some interesting things happen in Europe, you know, the elections over there.

So, you know, maybe there's a change of foot where the new electorate, the new politicians that are being elected around the world are gonna look at their systems and say, "Hey, look, you know, you central banks, you shouldn't be manipulating markets the way you are. Why are governments, you know, in the markets? Why are governments buying stocks? Why are governments buying and selling commodities? It just doesn't make sense." I think if you ask the average person on the street, you know, "Should governments be in the markets?" I think virtually everyone asked would say, "No, absolutely not. They should be focusing on supplying services to the people, not manipulating markets," yet they do it on a regular basis and they have to be told not to.

Craig: And even in the face of that, Keith, it looks like we have a good year ahead of us. Just personally, you feel pretty good about silver prices in 2017?

Keith: Yeah. I'd love to see a bit of a repeat from 2016, without the summer correction, but we had a great first six months of 2016 where it started off to a bit of a nice start in 2017. Look, I'm a huge bull on gold and silver, so you know, they should be much, much higher than where they are today. You know, silver is being gobbled up around the planet, you know, in every kind of industrial use you can imagine, and we're mining nine to one gold silver right now. So for every one ounce of gold, we're mining nine ounces of silver.

So in my mind, silver should be trading at, you know, about that ratio, which should put it much, much higher than where it is today. And so investors should be looking at this industry because it's beaten up. It's down substantially. And you know, talking about First Majestic, you know, our cash flows, even though silver is not that exciting at 17 bucks, are pretty darn good. You know, our treasury is going up every quarter. We ended 2016 with a record treasury of over $120 million in the bank. So we're excited, and we're starting to reinvest capital this year. We've got quite a large capital investment in Mexico in development and exploration. And we're looking for increased production over the next, you know, two, three, four, five years.

Craig: Sounds good, my friend. Sounds like we're gonna have a fun year ahead. Again, this has been our interview with Keith Neumeyer, who is the president and CEO of First Majestic Silver and the chairman of First Mining Finance. Keith, it's been great fun visiting with you. Thank you for spending some time here with us at Sprott Money News.

Keith: Yeah, it's great that your listeners were able to, you know, send some questions in. They weren't the easiest questions obviously. But look, we're all in this together, and you know, I think we just have to be very vocal with what's going on in the marketplace.

Craig: Well, please keep up the good work and thank you for your time this morning. And from all of us here at Sprott Money News and sprottmoney.com, thank you for listening. We'll talk to you again next month.