Precious Metals

First Majestic Silver’s decision to postpone the sale of about 934,000 ounces of silver could help push prices up.

Q3 results season is in full swing, and it’s tough to catch every company’s news as it comes out. Investors should thus be forgiven if they missed First Majestic Silver’s (TSX:FR,NYSE:AG) third-quarter production results last week. 

The company said that its five Mexico-based silver mines produced 3,523,536 silver equivalent ounces during the period, a 5-percent increase from the year-ago quarter. Meanwhile, total silver production came to 2,680,439 ounces, while the mines also produced 9,703,792 pounds of lead and 3,222,877 pounds of zinc; though silver production was largely unchanged from Q3 2013, lead and zinc saw bumps of 14 and 44 percent, respectively.

However, the most interesting part of First Majestic’s release is the news that it plans to postpone the sale of about 934,000 ounces of silver. According to the company, the move is an “attempt to maximize future profits.” It believes the “suspension of sales will result in lower revenues and earnings for the third quarter,” but sees the inventory being sold in Q4.

Silver miners take control

Putting the decision in context, Andrew Chanin, co-founder of the PureFunds ISE Junior Silver ETF (ARCA:SILJ), told Silver Investing News, “this is something that over a year ago we were talking about — the reality that down the road if we were to experience prices for silver that were below the production costs of some of the miners … they might sit on it and stockpile it.”

It’s a shift he’s been eagerly awaiting due to the fact that if enough companies withhold their production “it could pull significant amounts of silver out of the supply equation as far as what investors and consumers are able to access.” That, of course, could ultimately spur higher prices for the metal — certainly a welcome thought in today’s rough markets.

The key question now is whether other silver producers will follow suit. “Given that First Majestic is such a well-known name within the silver space I think [the company] could be a leader in doing this and demanding a price that is more in line with what it views the proper price to be,” said Chanin, adding, “the more companies that follow First Majestic’s lead, the stronger effect there will be on the silver price. It’s a fantastic first step in silver miners trying to get some control of their own future.”

Possible troubles

That said, Chanin pointed out that there could be some problems with silver companies all holding back their production. Explaining, he noted that if multiple companies decide to sit on stockpiled silver “you might see more exaggerated moves to the downside” if they all decide they’re ready to sell at the same time.

For him, however, that’s not a big concern. If more companies follow First Majestic’s lead, he said, they will likely re-enter the market at different times “so it could be a little here and a little there from one company and then the next.”

Another possible issue was pointed out by Mineweb’s Lawrence Williams last week. In an article on First Majestic’s Q3 release, he states that “obviously” the company’s move “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.” However, he also notes that as First Majestic also produces substantial amounts of lead, zinc and gold as by-products, any negative financial effects should be minimized.

What’s next?

First Majestic is currently trading at $8.27, though it climbed as high as $8.69 last week following the release of its Q3 results. Year-to-date the company is down 20.71 percent, but it’s clear from both last week’s stockpiling announcement and cost-cutting measures announced throughout the year that management is looking to halt that decline.

For their part, investors certainly seem to believe First Majestic is taking steps in the right direction. An abundance of Seeking Alpha contributors have praised the company in the lastcouple of weeks, and even GATA’s Chris Powell, who believes that “[n]inety-nine point nine percent of gold and silver mining companies and their executives are brain-dead,” has said the company’s decision to withhold its production shows that it has “far more than a clue” about how to operate in today’s markets.

It will be interesting to see how First Majestic’s move plays out in the months to come.

 

Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article. 

Editorial Disclosure: 

Related reading: 

3 Catalysts for a Silver Price Rebound

The Gold/Silver Price Ratio is Out of Whack — What’s Next?

Survey: Is a Silver Supply Shortage on the Horizon?

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