The Hera Research
Newsletter (HRN) is pleased to present an incredibly powerful interview with
Keith Neumeyer, Chief Executive Officer, President
and Director of First Majestic Silver Corp. (TSX:FR / NYSE:AG). Mr. Neumeyer began his career at the Vancouver Stock Exchange
and worked in the investment community for 26 years beginning his career in a
series of Canadian national brokerage firms including McLeod Young Weir (now
Scotia McLeod), then Richardson Greenshields and
then Walwyn Stogell McCuthchen (which became Midland Walwyn).
Mr. Neumeyer moved on to
work with several publically traded companies in the natural resource and
high technology sectors. His roles have included senior management positions
and directorships in the areas of finance, business development, strategic
planning and corporate restructuring. Mr. Neumeyer,
who has listed a number of companies on the Toronto Stock Exchange, has
extensive experience dealing with financial, regulatory, legal and accounting
Hera Research Newsletter (HRN): Thank you for joining us
today. Let’s begin by talking about silver supply and demand.
Keith Neumeyer: Silver mine production was
around 736 million ounces in 2010. Demand was around 1 billion ounces. Scrap
silver recycling and some government sales filled the gap. We’re at
historic lows in terms of above ground silver. Eric Sprott
recently said there are 1 billion ounces of triple nine silver left
aboveground. Unlike gold, silver gets used. We’re at historic highs in
supply when it comes to gold, but the exact opposite is true for silver.
HRN: Is there a deficit in terms of mine supply?
Keith Neumeyer: We’ve had a supply
deficit for the past 13 years. 2009 was the first year we created
equilibrium. We only went into a surplus in 2010, in terms of industrial and
jewelry fabrication demand. The surplus mine supply was purchased by investors,
obviously. A lot of mining companies are showing lower production because a
lot of silver comes from base metals and, with lower base metals prices,
it’s becoming more difficult. I don’t see any major supply
drivers for silver in the next several years.
HRN: Do you expect more scrap silver to enter the
Keith Neumeyer: That’s what
happened in 2009 when gold rallied over $1,200 and then corrected to below
$1,100. It was primarily caused by scrap gold entering the market. I believe
the same thing was happening for silver. We’ll see that again as the
metals make new highs. It’s the same as a stock. You replace part of
the shareholder base at different levels.
HRN: Are you optimistic about future demand?
Keith Neumeyer: Yes, I’ve been
optimistic about silver since 2002 because silver is a strategic metal.
I think it’s more important than gold.
HRN: Are there new applications that could increase
Keith Neumeyer: We’re seeing all
kinds of new applications. A recent report by Barclays forecast that 120
million ounces of silver will be used for solar power generation in 2012
versus 40 million ounces in 2009. The battery industry is growing as
well. Zinc-silver batteries provide very stable capacity—their
output doesn’t degrade like lithium batteries—and they deliver
40% more energy compared to nickel metal-hydride batteries. They’re
safer than water-based chemical batteries because they don’t heat up or
explode. They’re also mercury free and 95% recyclable. Lithium-ion
batteries in cell phones, for example, need to be replaced after 12 to 18
months. I’m very optimistic about battery technology. There are
also robotics and other applications on the horizon.
HRN: What’s your long term price target for
Keith Neumeyer: Silver will reach a
value based on its natural ratio of 15:1 with gold. I expect to see at least
$2,000 gold and most likely $3,000 in the next 3 to 5 years, so silver will
be between $130 and $200. It’s a big number from where we are
today but that’s where I think we’re headed. We’re
dealing with a market that needs to be corrected.
HRN: Isn’t the price of silver set by supply
Keith Neumeyer: I don’t think
supply and demand has anything to do with the price, unfortunately. The world
we live in today is a paper environment where silver is priced by financial
circumstances. Banks, traders and investors around the world move
markets to where they want them to be. Governments and commercials—big
banks like HSBC and JP Morgan—all have a piece of the action. They
alternately work together or sometimes against each other. All these forces
price the metal. That’s one reason we’re seeing the
volatility that we’re seeing today.
HRN: How can supply and demand be irrelevant?
Keith Neumeyer: In short term trading,
the price is financially driven. Eventually, markets do correct themselves
over time. In the long run, supply and demand does have influence.
That’s why the price will ultimately return to its natural ratio of
HRN: How is the price of silver financially
Keith Neumeyer: It has to do with the
financial instruments that we trade in and with the fact that silver trades a
billion ounces per day on the COMEX alone when there are 26 to 30 million
ounces of silver available for delivery. With that kind of leverage, you just
don’t have a proper market.
HRN: It has been reported that there are 100
ounces under contract for every ounce in the COMEX warehouse.
Keith Neumeyer: The governments,
regulators and bullion banks have let the silver market get more and more
leveraged. We’ve seen a lot of wealth destruction as a result of
this leverage and we’re going to see a lot more until, finally, the
governments decide to change the system.
HRN: Isn’t the COMEX guaranteeing market
integrity, by raising margins, for example?
Keith Neumeyer: I don’t buy the
argument on margin hikes at all.
HRN: Don’t margin hikes prevent dangerous
asset price bubbles?
Keith Neumeyer: It’s not up to
them to decide what is parabolic. They’re not investors themselves.
They don’t have money in the market. They decide a bubble is going to
happen if they don’t raise margins but no one knows when a bubble is
forming. It is only apparent after it’s already happened. By
hiking the margins, they create the appearance of a bubble bursting. They
create the bubble. They create the proof that it was a bubble. If they
let it alone, the market would stabilize by itself.
HRN: What should the Commodities and Futures
Trading Commission (CFTC) do?
Keith Neumeyer: The job of the
regulators is to protect the retail investor. That’s their only
job. It’s not to protect the banks or the brokerage firms. The
little guy is the primary taxpayer. Why were the Securities and Exchange
Commission (SEC) and the CFTC put in place? They were put in place to
protect retail investors. Prior to regulation, the banks controlled the
market. Today, the banks control the market again. Who should control the
market? Retail investors. Who’s protecting them? No one.
HRN: Are you saying that the CFTC does nothing while
the COMEX caters to banks and brokerage firms?
Keith Neumeyer: Yes.
HRN: And the COMEX doesn’t serve retail
Keith Neumeyer: No. Absolutely not.
HRN: Do you foresee a return to a free market in
Keith Neumeyer: I’m an optimist. I
believe one day that governments will rewrite the rules and force the
regulators to protect investors. That’s where we were back in the
‘70s and that’s where I think we have to be again to correct the
problems that have arisen over the past 40 years. Silver is being
revalued. It’s going to affect a lot of people along the way and it
will change the financial system. Ultimately, we’re going to have a new
financial system and, hopefully, we’ll go back to natural markets,
completely driven by supply and demand. It may take another 20 years
but I think it will happen.
HRN: A new financial system?
Keith Neumeyer: If I’m wrong, the
banks will run the world, even more so than they do today, 10 or 20 years
from now. God forbid that we ever get there because that’s a one
currency, one government world that would absolutely be a disaster for the
human race. There would be no freedoms at all to move or to
invest. It would be like having shackles on our ankles. There is a
movement to go in that direction, unfortunately. There are a number of very
wealthy people that want to see that. I hope that we can find the
politicians to prevent that type of world from coming to pass.
HRN: Thank you for your time and for your candor.
Keith Neumeyer: It was a pleasure.
Keith Neumeyer, Chief
Executive Officer, President and Director of First Majestic Silver Corp. (TSX:FR / NYSE:AG) is an industry leader who analyzes the
silver market with the gloves off. In the wake of the failure of
commodities trading firm MF Global, Mr. Neumeyer’s
lack of confidence in the CFTC and in the integrity of the COMEX appears to
First Majestic Silver, which is one of a small
number of primary silver producers, has consistently increased its
production, cash margins and mineral resources while lowering production
costs. With three operating mines and a fourth mine under construction, the
company is growing steadily from a junior producer to a mid-tier producer
that expects to produce 10 million ounces of silver in 2012.
Editor’s Note: Hera Research, LLC or its
Directors are shareholders in First Majestic Silver Corp.
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Ron Hera is the founder of Hera Research, LLC, and the principal author of the Hera Research
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