US$1BN deal for a Mexican silver project?
$2.1BN First Majestic is taking over an underground silver mine in Mexico for US$970M.
Is First Majestic trying to move before the silver price starts running?
We think it might be.
The takeover bodes well for our Mexican silver/gold Investment Mithril Resources (ASX: MTH).
MTH’s project currently has a JORC resource of 11 million oz silver and 373,000 oz gold.
(529,000 ounces of gold equivalent)
MTH is currently drilling to try and expand that resource towards a target of ~1m ounces of gold equivalent.
The reason why we think today’s news from First Majestic relates to MTH is because of where MTH’s project sits and the background of its MD - John Skeet.
MTH’s asset also sits in a part of Mexico home to some of the biggest silver producers in the world including Fresnillo (the world’s biggest silver producer).
MTH’s project also sits along the same regional trend where John Skeet (MTH’s MD) has had success in the past…
Prior to leading MTH, John Skeet was the General Manager of Projects for Bolnisi Gold.
Bolnisi Gold grew its Mexican gold-silver asset from a modest JORC resource to a ~$1.1BN takeover in under 5 years.
A quick recap of the Bolnisi story:
- Picked up the asset in 2004,
- Drilled it out over the next ~3 years
- Upgraded the project's JORC resource several times,
- Raised tens of millions of dollars, AND
- Started constructing a mine.
During the construction phase, Coeur Mining came in and took over the asset for US$1.1BN.
Note: We covered in our weekend note about M&A activity coming at any time - the Bolnisi takeover is a great example of that.
In just a few years, the Bolnisi share price went up from ~A$0.16 to ~A$3.27.
A 20X return in just three years.
The past performance is not and should not be taken as an indication of future performance. Caution should be exercised in assessing past performance. This product, like all other financial products, is subject to market forces and unpredictable events that may adversely affect future performance.
So Skeet has delivered large resource growth in a bull market for precious metals, in Mexico, and has been involved in a “top of the market” takeover for said resource…
With M&A now back in the spotlight in Mexico after today’s deal by First Majestic.
AND the silver price threatening to breakout into multi decade highs, we think the macro tailwinds for MTH are starting to get stronger.
Our view is that if the Silver price runs hard, M&A deals like the First Majestic deal will become bigger and more common place…
Why we think the Silver price could go higher.
Silver is in the headlines now:
But, for a long time we believed the price of silver was trading unsustainably low.
We have been Investing in commodities companies for decades now and one way to gauge IF a commodity is likely to rally hard is to try and plot what is called “incentive prices” against the chart for that particular commodity.
Incentive prices refer to the price for a commodity where companies see it as worthwhile to either explore for OR develop advanced assets.
I.e if the cost to produce a commodity is say, $10, then the incentive price would need to be way above that number for it to be worth building a huge mine and taking on all the risks associated with that.
And for explorers, the incentive price is usually even higher - where the price needs to be high enough to make it worthwhile spending money on high risk/high reward exploration.
When it comes to silver, we think the market traded well below incentive pricing for far too long.
That period of low prices resulted in mines being shut down or new mines not being built AND a complete lack of exploration looking for new discoveries.
Fresnillo plc is the world’s biggest silver producer.
Below is a slide taken from the Fresnillo 2023 results presentation which shows the All in sustaining cost (AISC) for two of its silver mines.
One is at US$21 per ounce and the other at US$14.5 per ounce.
(they must be a lot happier with silver at ~US$30 per ounce)
Naturally, their assets are in the lowest cost quartile for silver producers.
So, US$14.50 to US$21 is as good as it gets when it comes to the cost of mining silver.
( Source )
Now looking at the silver price…
The above numbers show us roughly how much it costs to mine silver.
The next thing to think about is how much a miner can sell its silver for.
For over a decade the silver price traded between ~US$13 per ounce and ~US$22 per ounce.
Those prices were nowhere near high enough to justify bringing new silver mines online, and they were especially not high enough to incentivise new exploration.
The past performance is not and should not be taken as an indication of future performance. Caution should be exercised in assessing past performance. This product, like all other financial products, is subject to market forces and unpredictable events that may adversely affect future performance.
Taking into consideration the time it takes to bring new projects online, the forward outlook for silver supply is relatively grim.
New mines can take up to ~17 years to come online following a discovery. Obviously projects at a more advanced stage in terms of development can come online quicker.
All in all, we think the silver market currently finds itself in a position where there is no new supply coming online and demand could be about to go exponential…
Exponential silver demand growth projected to 2050
By 2050 - 50% of silver demand is expected to come from the solar panel manufacturing market. This is a relatively recent development in the silver market.
The chart below shows how demand for silver is expected to rise by over 250% by 2050 due to solar alone:
( Source )
Demand is growing, BUT global silver production is declining…
Globally, silver production declined by 0.7% in 2023. ( Source )
Decreasing production isn't just a “2023 thing” either.
Global silver production has been trending lower since 2016... ( Source )
( Source )
Production falls have led to deficits for 3 years straight…
While the last three years have seen a significant large supply deficit emerge. ( Source )
( Source )
We think the silver price is running largely as a result of the supply/demand imbalances the market is starting to price into the silver market.
Our view is that over the next 5-10 years, the silver price will need to go a lot higher then where it is today, to incentivise new exploration and new mine supply.
What’s next for MTH?
🔄 Additional assays (soon) - this will tell us how much additional, (hopefully) high grade gold-silver mineralisation is at MTH’s project in Mexico.
🔄 TSX-V listing (soon) - this should open up MTH to a new group of gold-silver investors in Canada, which we think could be well capitalised given recent M&A events in precious metals in North America
🔄 More drilling on existing and new targets (ongoing) - we want to see more drilling to expand the resource, and MTH to have a crack at one of numerous targets on its large project.
🔄 Ultimate goal: double JORC resource (Q1 2025) - this would enhance the scale of MTH’s project and make it more attractive as an investment for larger funds and increase its standing among precious metals projects around the world.
