With its five operating silver mines in Mexico, miner First Majestic Silver has announced its Q3 production figures and interestingly, that it is deferring some silver sales due to the low silver price.
As company President and CEO, Keith Neumeyer notes in a statement accompanying the figures that silver prices declined 19% in the third quarter – representing the second largest quarterly decline since the financial crisis in 2008. Indeed the price has fallen yet further since the end of the quarter. As a result of this weakness, the company has decided to temporarily suspend silver sales in an attempt to maximise future profits. This sales suspension will result in lower Q3 revenues and earnings.
Obviously this is something of a gamble that silver prices will pick up in Q4 and although the gold price has seen something of a recovery, the silver price has been further depressed, briefly falling below $17 an ounce on Wednesday morning – the lowest price level since 2010.
Neumeyer goes on to note, however, that it is likely that these inventories of unsold ounces will instead be sold during the current quarter. But if silver prices remain depressed, what then? As of September 30, First Majestic was holding approximately 934,000 ounces of silver in inventory.
Chris Powell of the Gold Anti-Trust Action Committee (GATA) has published a comment thoroughly approving of First Majestic’s decision in making a move GATA has recommended to other producers. This on the grounds that silver supplies to the markets are limited and that if other producers also hold back on deliveries, there would be a serious physical silver supply squeeze driving the price up.
The outspoken Powell, somewhat harshly in our view, scathingly pours scorn on the top management of most gold and silver producers in his note, for not being prepared to take the kind of action Neumeyer has taken.
Powell’s comment was as follows: “Ninety-nine point nine percent of gold and silver mining companies and their executives are brain-dead, merely geologists and accountants, unaware of the monetary nature of their product and how their product is priced by surreptitious market intervention by central banks. But here and there certain companies and their executives have a clue, and First Majestic Silver Corp. today again proclaimed itself to have far more than a clue.”
Powell goes on to point out that First Majestic has always looked at other ways of maximising value out of its silver production, through minting its own silver rounds, bars, and ingots and selling them directly to the public, thus generating a premium over the prevailing silver price for some of its output.
Of course First Majestic does not rely on silver alone for its revenues and earnings, so perhaps the financial effects of withholding its silver from the market will not be as serious as it might be were it not for its substantial byproduct output of lead, zinc and gold. Nonetheless, at the current low silver price its stated inventory would be worth some $15.9 million – around a quarter of its quarterly revenue figures based on Q2 results. Although with zinc prices in particular having risen over 20% in the past year, the byproduct earnings are substantial.
In Q3, First Majestic produced 2.68 million ounces of silver, 9.7 million pounds of lead, 3.2 million pounds of zinc and 2,781 ounces of gold. Zinc output was actually up 22% quarter on quarter. As can be seen by these figures, the silver inventory at the end of the quarter was only around 35% of Q3 production, so presumably First Majestic did sell 65% of its silver over the period.
Because of the low silver prices, First Majestic has also been managing cost reductions by improving efficiencies and cutting labour – although the impact of the latter will not be apparent in the company’s earnings until Q4, due to severance charges.
We now await Q3 financials, which will probably be released in mid-November, to see exactly what the impact of the lower silver prices and silver sales deferrals will be on the quarterly earnings figures.