First Majestic Silver deepens its Mexican roots

After founding First Quantum Minerals (TSX: FM; LSE: FQM) in 1992 and putting together the early team that was responsible for the company’s first acquisitions in Africa, Keith Neumeyer felt it was time to move on.  The year was 2000, and he needed a new challenge.

“It was a long time to be at one company, and it was a different environment back then,” Neumeyer recalls of his decision to leave First Quantum 14 years ago.

“It wasn’t an exciting period for mining — it was a difficult time for mining. I became more of an administrator than anything, and the company was being well run at the time and I wasn’t really adding the value that I would have liked to add, so I thought it was time in my career to form another company.”

That company turned out to be First Majestic Silver (TSX: FR; NYSE: AG) and from its creation in 2002 it has grown to become the second-largest silver producer in Mexico, with five operating mines and a number of exploration projects.

Neumeyer’s enthusiasm and interest in silver and the easy availability of assets at the time in Mexico made the country a logical choice, he says.

He started off acquiring a handful of exploration assets in 2002 and looked for producing assets the following year. By January 2004, Neumeyer and his team selected their first one — La Parrilla, an old silver mine, 65 km southeast of Durango in the western part of the Mexican Altiplano.

The mine operated in October of that year at a rate of 180 tonnes per day. But it has accelerated since then. In the second quarter of 2014, the mine produced 1.1 million equivalent oz. silver at a cash cost of US$5.76 per oz.

After buying La Parrilla, First Majestic went on to acquire another four mines: La Encantada in northern Mexico, 708 km northeast of Torreon in Coahuila; San Martin, 250 km north of Guadalajara city in Jalisco state; La Guitarra, in the southeastern Mexican silver belt, 130 km southwest of Mexico City; and Del Toro, 60 km southeast of La Parrilla in the municipality of Chalchihuites, Zacatecas.

The company expects the five mines this year will churn out between 12.7 million and 13.3 million oz. of pure silver — or between 14.8 million oz. and 15.6 million equivalent oz. silver. Full-year cash costs are forecast at US$8.67 to US$9.12 per payable silver oz., with sustaining costs of between US$5.40 and US$5.56 per oz.

“I think I was right making that call on Mexico,” Neumeyer says of his decision more than a decade ago to start First Majestic Silver. “We were able to build an exciting portfolio of assets which, quite honestly, could not be duplicated today because the environment is quite different.”

In the three months ended June 30, the company generated revenues of US$66.9 million, up 3% over the first quarter, while net earnings after taxes increased US$1.6 million to US$7.6 million, or US2¢ per share, after excluding non-cash and non-recurring items.

First Majestic’s next operating mine will be Plomosas, 94 km southeast of Mazatlan in southeastern Sinaloa state, which was acquired in July 2012 by buying Silvermex Resources. Two key areas of interest on the 69.9 sq. km property are the historic operations of the Rosario and San Juan mines.

Extensive facilities and infrastructure are already in place on the property, including a fully functional mining camp facility; a 20-year surface-rights agreement in good standing; a 30-year water-use permit; a tailings dam; a 60 km long, 33-kilovolt power line; a 120-man camp, infirmary, offices, shops and warehouses; and an assay lab.

Underground development at the Rosario and San Juan mines also allow rubber-tire access to mineralized zones, which should accelerate development when First Majestic determines to proceed with the project.

“It’s going to take a few years,” he says of Plomosas. “Due to the environment, the increase in taxes as well as lower metal prices we’ve curtailed spending quite a lot and cut our budget substantially from where it was a couple of years ago, so all our new investments are on hold until the environment changes, but when we start reinvesting again Plomosas will be our next mine.”

In the meantime First Majestic is looking for ways to cut costs and improve efficiencies, and expects to do that mostly through innovation and automation. Between now and the end of 2015 the company plans to invest US$20 million to automate anything from data collection to milling, assays and recoveries. First Majestic already cut back the number of its employees from 4,900 in early 2013 to 4,100 people today. “We’re hoping to automate as fast as we can,” Neumeyer says.  “It’s an important area of investment.”

At the same time, First Majestic is deepening its roots in the country. On Aug. 26 it listed its shares on the Mexican Stock Exchange in a bid to strengthen its exposure and reach some of the country’s largest institutional investors, as well as retail investors.

“We did it because we’re a big player in Mexico. We’re the second-largest silver producer, and a significant employer and taxpayer in Mexico, so we felt it was important to Mexican investors and institutions like pension funds to have access if they wish to invest in First Majestic in their own currency, rather than having to go to New York or Canada. It lowers their costs, and hopefully as a result we gain from Mexican shareholders,” he explains.

Neumeyer says the company thought about listing in Mexico two years ago and that the process took about one year from start to finish — a big contrast to the three months it took to list its shares in New York. And while he is the first to admit it was a difficult and labour-intensive exercise because Mexico is so bureaucratic, he says it was worth the wait.  

“I think Mexico is one of the better jurisdictions to be active in as a mining company,” he says, pointing to the country’s proximity to the U.S. and Canada, reasonably low costs, good regulatory and accounting system, and geological potential.

“Over the next ten years there will be several discoveries of significance here,” he predicts. And from a permitting perspective, he adds, it is “fairly straightforward.”

“It is getting more challenging than it was five or ten years ago, but Mexico is still a good place to be a miner and mining is so entrenched in Mexican society.”

He says that “you’d be hard-pressed to find a Mexican family not having somebody in their family that is working for a mine or a mining company, or somehow related to the industry … compare that to a family in Canada or the U.S., and you’d be hard-pressed to have any individuals working in the mining sector. So they’re complete opposites, and that entrenched acceptance among Mexican people of mining helps the sector quite a lot … that knowledge of mining I think makes it easier to open a mine.”