http://www.bloomberg.com/news/articles/2016-0...-silver-pric...
A major Japanese electronics maker approached First Majestic Silver Corp.
for the first time last month seeking to lock in future stock, a sign of
supply concerns that could boost the metal’s price ninefold, according to the
best-performing producer of the metal.
“For an electronics manufacturer to come directly to us -- that tells me
something is changing in the market,” said Keith Neumeyer, chief executive
officer of First Majestic, the top stock in Canada and among its global peers
this year. “I think we’ll see three-digit silver,” he said, predicting the
metal could surge to $140 an ounce by as early as 2019.
That's a bold forecast. While silver has rallied 19 percent this year to leapfrog
gold as the best-performing precious metal, it settled lower Wednesday at
$16.26 an ounce on the Comex in New York and reached a record of just under
$50 in 2011. The highest projection among analysts surveyed by Bloomberg is
$57 an ounce in 2019.
"That seems aggressive," Dan Denbow, a portfolio manager at the
USAA Precious Metals & Minerals Fund in San Antonio, said by e-mail.
"There has been a lack of investment in silver exploration, but with
significantly higher prices you will get new supplies. The current cost curve
wouldn't support that price."
Still, there are other optimistic signs for silver rising. Hedge funds
expanded their bullish bets on the metal to an all-time high earlier this
month.
Because the commodity holds appeal both as a store of value as well as for
its multiple industrial uses, it surged earlier this year on speculation that
the pace of U.S. interest-rate hikes will slow and that Chinese manufacturing
may be improving.
First Majestic is the second-biggest silver producer in Mexico, which
supplies more of the precious metal than any other country. As such, the
company has been a primary beneficiary of the silver rally after choosing not
to diversify into other metals like many of its peers. The company earns more
than 63 percent of its sales from silver and its share price has more than
tripled this year, more than any other company on the S&P/TSX Composite
Index. The stock rose 2.2 percent to C$14.65 at 9:51 a.m. in Toronto, giving
it a market value of C$2.36 billion ($1.82 billion).
While long coveted for use in jewelry, coins and utensils, silver is
increasingly in demand for its industrial applications. Last year, about half
of global silver consumption came from such use, including mobile phones,
flat-panel TVs, solar panels and alloys and solders, according to data
compiled by GFMS for the Washington-based Silver Institute.
"Silver is not a precious metal. It's a strategic metal,"
Neumeyer said in an interview in Vancouver, where the company is based.
"Silver is the most electrically conductive material on the planet other
than gold, and gold is too expensive to use in circuit boards, solar panels,
electric cars. As we electrify the planet, we require more and more silver.
There's no substitute for it."
Industrial demand is set to increase, driven by rising incomes and growing
penetration of technology in populous, developing nations, as well as thanks
to new uses being found for silver's anti-bacterial and reflective properties
in everything from hospital paints to Band-Aids to windows.
"Over the next 10 or 20 years, more and more people are going to be
using these devices, and silver is a very limited commodity," Neumeyer
said. "There's just not a lot of it around."
Use of silver, including investment demand, coin sales and what goes into
inventories to settle trades, has outstripped annual supply of the metal in
every year since 2000, according to data from GFMS, a research unit of
Thomson Reuters Corp. Still, not everyone agrees that the world is headed for
a shortage of the metal.
"I would tend to disagree that silver is rarer than thought,"
David Lennox, a resource analyst at Fat Prophets in Sydney. "Silver
cannot be easily substituted but there's been no need as it's in abundance.
I'd expect the search for silver would intensify and the search for
substitutions would happen long before silver got to" $140 an ounce.
About 50 percent of global demand last year came from price-sensitive
sources such as retail coins, jewelry and silverware, which would help curb
price increases, said Erica Rannestad, a senior analyst at GFMS in Chicago.
"Increased market penetration in emerging economies certainly will
result in higher per-capita consumption of silver in industrial uses, but
this is over the long run and would not happen overnight."
Neumeyer said his company has no immediate plans for acquisitions,
dividends or to take on any debt. The company raised C$57.5 million from a
share sale earlier this month. It plans to use funds internally for
development and exploration of its mines, which had suffered from
underinvestment during the recent downturn. "The capital will be used to
look internally," he said.
Neumeyer acknowledges his forecasts aren't always correct. First Majestic
had estimated silver at $14 an ounce for this year's budget. "I think
I've been wrong every year for the past four or five years."
Still, he's unfazed by his past record.
"The silver rally is just beginning," Neumeyer says. "What
we've seen in the last two months is just the beginning of the next bull
market."
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