Keith Neumeyer
President & CEO
First Majestic Silver
View from the Top

Silver Giant Moving Away From Mexican Commitment

Wed, 10/21/2015 - 17:28

Q: First Majestic has been a senior silver producer ever since 2013 when your silver production equaled 10.64 million ounces. What has this status meant for the company?

A: As First Majestic has become bigger, certain aspects of our business have become more complicated. From a social perspective, the responsibilities of the company are more important now than before. We have influence over the lives of 40,000-50,000 people, including our 3,700 employees. First Majestic is 50% owned by institutions that desire to see stability in our operations. Since there is little guarantee of stability in metal prices, our owners want to see stability in our management, production, growth and responsibilities. These are the benefits of investing in a company of our size.

Q: What steps has First Majestic taken to modernize its Mexican mining operations?

A: The mining industry is seeing a new wave of innovation due to the current economic environment. When we were dealing with a silver price of US$35-40 per ounce, a lot of waste was created due to a confidence that cash flow would continue steadily. But as prices have come down and taxes have increased, we have had to focus on becoming leaner, this is why we reduced our workforce from a peak of 4,900 people in January 2013 to 3,700 in December 2014. Due to the continued efforts to reduce costs, another decrease of 5% is on the horizon. Mexico is a little behind on innovation and the use of technology, so modern advancements and new ideas are exciting for the Mexican mining industry. Many mines in Canada or the US now have automated mills and processes. The entire milling operation is monitored by a few individuals in a central computer room. First Majestic still requires a lot of people as part of its operation and we need to change that. We need to modernize our business and make ourselves more cash-effective and resilient during downturns.

Q: Why are Mexico’s mining operations not as technologically advanced as those in Canada?

A: The Mexican mining industry is headed by an older generation of experts who have been mining for 30 or 40 years. The number of geology and mining engineering graduates around the world is quite small, whereas graduating classes were much larger 20 to 30 years ago. As a result, there is an age gap of several decades between the young people entering the industry and those in their 60s running mining companies, though this gap is now slowly closing. The younger generation is coming up with ideas on how to automate a mill, for example, but the older generation is afraid of losing their jobs. However, mining needs to modernize, particularly as it is under attack worldwide from NGOs, environmental regulations, and taxation. All of these assaults, combined with the lower price of metals, have made our business a lot tougher. We have to start developing innovative solutions to improve the industry both environmentally and financially.

Q: First Majestic has managed to keep its cash costs low while increasing production by 41% since 2012. What made this success possible?

A: The cash cost measurement is an old way of measuring success. Mining companies have often used this measurement to prove they are the lowest cash cost company in the market. In response, banks and analysts have come up with new ways of assessing costs, such as all-in-sustaining costs or all-in costs. These new measurements are widely followed today. Our all-insustaining cost is around US$16 per ounce of silver, while our cash cost is US$9. Governments all around the world have been misled by the ways mining companies have reported their finances in the past, which is one of the reasons these companies now find themselves under assault by authorities. Governments assume that mining companies are huge cash-generating machines and that they are entitled to a piece of that action, when in fact such companies already give back to the areas in which they work. First Majestic has 3,700 employees in the five towns we are active in, but we are the only employer there. If we were not there, these towns would either be ghost towns, or be a lot smaller and poorer. We are proud of our skilled team of mining professionals that continue to focus on production costs. The alternative would be to close the mines, which would be very harmful for the local communities. We need to do whatever we can to keep the mines operating.

Q: Despite being the most productive of First Majestic’s mines, La Encantada’s silver recovery was 49% in 2013. What technical challenges are reducing recovery efficiency at La Encantada?

A: La Encantada has always posed a metallurgical challenge. Since 1974, when it first started producing silver, its recovery rates have fluctuated between 40-60%. This is linked to the manganese level associated with the silver. The higher the manganese level is, the lower the recovery will be. We try to maintain a 2% or lower manganese level in the ore entering the mill. However, we do not always have available ore that has a manganese level lower than 2%, and when that happens, we have to mine what we have. This is why we see fluctuations in recovery that reach up to 60% some days. Our historic average recovery rate is 50% and there is not a lot we can do to control it. We have tested several technologies and methods in the last couple of years, and we have found that for every 1% increase in the recovery rate, we extract 40,000 additional ounces of silver. Increasing recovery really does pay off.

Q: Do you store the ore that does not meet the cutoff grade?

A: In the end, First Majestic needs to produce ounces of silver. Ore that contains 5-8% manganese would be very disruptive for the mill, and we have to be very careful about that. We have to process those ores on a highly diluted basis, so we might only use 100 tonnes of this high manganese ore and blend it with ore of 1.5% manganese in order to reach the target of 2%. That falls within the geological engineering scope of work being done at the mine, and it is up to the mine managers and the geologists to decide how to manage this material on a daily basis.

Q: The Del Toro mine has been the biggest investment in First Majestic’s history. What is the story behind the mine and how has this investment affected First Majestic?

A: Excluding Del Toro, all the mines we have built in the past have been old mines. When we bought La Encantada in Coahuila, it had a mill, the infrastructure was in place and a mine had already been developed. All we had to do there was bring in new processes and more investment to expand the operation. The same thing happened at San Martin, La Guitarra, and La Parrilla. Then came the Del Toro silver mine in Zacatecas, which was the first mine that the company built from scratch. This was based on our geological team’s feeling that silver could be found on the property based on old Spanish workings that dated back 500 years. We drilled some interesting holes and found that they were right. We developed about 100 million ounces of silver over a fiveyear drilling program and then decided to build the mill. The US$150 million spent on Del Toro so far includes everything from exploration and mine development to the construction of the mill. Del Toro is likely to become our biggest mine, topping La Encantada within three years. This is exciting as we are adding 3 million ounces to our production, which represents 30% of our total annual production. In 2013, we increased production from 8.5 million ounces to 10.6 ounces year on year, and our target was to reach 13 million ounces in 2014. Most of the growth over this two-year period was thanks to Del Toro.

Q: How are your community development programs being affected by the mining royalty in Mexico?

A: It is optimistic to think that the royalty will actually fund any such projects. I have yet to see any government in the Western world taking money from companies and giving it to communities. Normally, when money ends up in federal coffers, it stays there until it is invested in whatever programs the government decides to spend it on. I personally believe that this initiative is robbing money from local communities, as companies like First Majestic are already the primary investors in these communities. We consider it our responsibility to supply and improve infrastructure, from water and electrical infrastructure to roads, schools, computers, sports fields, ambulances, hospital supplies, community centers, or buses for kids to go to school. Most of this infrastructure development is paid for by us, and we do it willingly. If the government thinks it can do a better job than us, then good luck to them. The communities are looking to us as we have turned the tap off. We have had to tell them that the government has pledged to give them that money, and that we can no longer provide all these services since we are paying an extra 8% in taxes. Mexico should focus on increasing its tax base rather than increasing taxation on those that already pay. Mexico has the lowest per capita tax base percentage in the entire OECD, with only 30% of the Mexican population paying taxes. The Mexican government should be focusing on increasing the tax base to 40% or 50% within the next ten years, not decreasing it as they have in recent years.

Q: How have the reforms affected First Majestic’s strategy given that the company is fully focused on Mexico?

A: We are unique as all of our assets are in Mexico, so we have been significantly more affected than the majority of companies. We are looking outside of Mexico, and we have to do that because our 38,000 shareholders worldwide are concerned about the growing instability in Mexico. We are more likely to start investing elsewhere now because the Mexican government has made our life a lot tougher than it already was. They should reconsider the changes that have been made.