First Majestic Silver Corp. (FRMSF.PK)

ChrisGraley: 99.58

This is a pure inflation hedge, and a lot of good arguments have been made for deflation, so consider what side you are on before making a decision. I'm of the opinion that the U.S. has printed so much money at this point that inflation is inevitable.

So why Silver and not gold? Silver is the poor man's gold. In inflationary times, it is the only precious metal that the average person can afford to invest in, other than buying jewelry at a pawn shop or coins from a coin dealer. Silver has another unique quality in that it is consumed by industry. 95% of all the gold that has ever been mined in history still exists, but since 1942, silver has been used at a faster rate than it has been produced. Now I'd like to talk about the gold/silver ratio. Both gold and silver fluctuate wildly on the open market, but a conservative historical gold/silver ratio is about 20:1. It used to be about 9:1, before huge deposits were found in the US, Peru and Mexico, but if you took the average of all gold and silver prices in history, you'd be able to sell 20 ounces of silver and buy 1 ounce of gold. Today's gold/silver ratio is about 65:1, which gives you a tremendous buying opportunity in itself. Because of the dual purpose nature of silver, it reacts slower to inflation, tends to surpass gold's reaction and takes longer to retreat. The main reason for this is the industrial use for silver. Inflation usually occurs in declining economies. Industry tends to slow as the economy declines, and since industrial demand slows the price of silver declines just as the price of gold increases in the anticipation of inflation. Once inflation hits though, and people scramble to fight inflation, silver prices are a better buy, due to the gold/silver ratio. As the economy improves, industrial demand increases to demand silver as the inflation hedgers are selling gold.

So why buy a mining stock and not an ETF? Well in the inflationary times ahead most "paper silver" ETF's will fail! There is one ETF called ZKB that trades out of Switzerland that is actually backed by silver, but that is not tradeable on CAPS. I would prefer physical silver over any ETF, but that isn't tradeable on CAPS. So the next logical step is a silver miner!

So why this silver miner? First there aren't a lot of pure silver plays out there. Most silver comes as as a secondary metal from other miners. First Majestic is a proven and well managed silver producer that still trades as a pink sheet stock at a bargain level! They have 3 producing mines that have all had cyanidation upgrades to improve efficiency.They also have 3 undeveloped properties that that show promise, silver, and an abundance of secondary metals. Within the 6 mines secondary metals include lead, zinc, and copper. They also have a cache of diamonds that they have yet to capitalize on. They are currently producing at 75% and can ramp up production easily with a better silver price. They are projected to produce 7.5 mil ounces of silver this year, but they have purposely scaled back production. I'm guessing that they produce 5 million this year unless inflation makes ramping up production worth it.

Next, I'd like to talk about leverage. Silver miners trade at about 14 times earnings. Fully diluted, that means that this company should make just below 11 million a year. If I take 5 million ounces a year at a low $14 an ounce minus $6.50 an ounce costs, I get $37.5 million a year. In other words in the worst case scenario this stock should more than triple! Forget if they get another mine developed. Forget that they have secondary metals. Forget that they have diamonds. Forget inflation and forget that they are on 75% production. If everything stays the same as it is right now this stock should triple.

The last thing I want to talk about is market risk. The above scenario is in a stagnant market. If everything stays the same, the stock should more than triple. If we have a Bull market, the industrial use of silver will increase and they will increase production. If we have a bear market with inflation, the price of silver will increase exponentially and so will production. I can't even fathom the stock price in that scenario. Now if we have a deflationary market, given the current price of silver, I think your still OK, because silver is trading at a level that is not priced to inflation. The gold bugs will be killed, but you'll still tread water.

Buy this stock now and you won't regret it!