By Natalie Obiko Pearson
(Bloomberg) -- 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.”
For recent projections on global silver production, click
here.
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).
‘Strategic Metal’
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.”
For a Bloomberg Intelligence overview of the silver market,
click here.
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.
‘Market Penetration’
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.”
