First Majestic Expands Silver Portfolio Amid A Global Supply Deficit

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The silver market, long overshadowed by its more illustrious cousin gold, is now capturing attention as demand outstrips supply. This can be evidenced by recent major transactions in the space. First Majestic (TSX: AG) (NYSE: AG) seemingly kicked off the latest round of M&A activity, when it was announced they would be acquiring Gatos Silver (NYSE: GATO).

The transaction is billed as part of its growth strategy to expand its production and add value to its portfolio. The acquisition is expected to bolster free cash flow to over US$70 million a year, while bringing annual production to 30-32 million silver equivalent ounces.

“Every three years, we’ve done an acquisition,” notes Mani Alkhafaji, VP of Corporate Development & IR at First Majestic, in a recent interview with The Deep Dive. The company’s acquisitions, including the most recent purchase, have been part of a consistent strategy to boost silver production, which is expected to increase by 60-70% from the Gatos Silver addition alone.

Surging Demand and Market Deficits

Silver demand is reaching unprecedented levels, and supply constraints are becoming increasingly evident. The Silver Institute projects that the market will face a 215.3 million-ounce deficit in 2024, up 17% from the previous year. Demand has surged by 2% year over year, driven primarily by robust industrial needs, particularly from sectors such as electronics, electric vehicles, and solar energy.

The industrial demand for silver hit a record 654.4 million ounces in 2023, and this figure is projected to climb further in 2024. The push for green technologies, like photovoltaic (PV) solar panels and electric vehicles, underpins this growing demand. The tech sector also contributes significantly due to silver’s unparalleled conductivity and reflectivity, which are vital in electronic components.

Military demand has also emerged as a key factor in silver’s rising consumption. Its applications in defense systems—ranging from weaponry to communication devices—make silver a strategic metal with critical use in advanced technology.

The data, as reported by the Silver Institute and Metals Focus, paints a concerning picture for silver supply. While mine production is estimated at around 1 billion ounces per year, the demand continues to outpace it, resulting in deficits for three consecutive years. By 2023, this imbalance reached 543 million ounces, and the deficit is expected to persist through 2024 and beyond.

A significant point of concern is that 80% of the global silver supply is derived as a by-product from mining lead, zinc, copper, and gold. This limited availability of primary silver mines constrains the ability to increase output in response to rising demand. Moreover, new discoveries are increasingly scarce and costly, further exacerbating the supply-demand imbalance.

As Philip Newman, managing director of Metals Focus, puts it, “The deficit in the silver market serves as a strong support and foundation for the price.” Despite a 30% reduction in the deficit last year, the shortage remains substantial.

The growing gap between supply and demand has direct implications for silver prices. Historically, silver reached an all-time high of $49.51 per ounce in April 2011, and while prices have since fluctuated, the trend has been upward. Silver prices increased by 35.85% since the beginning of 2024, reflecting heightened demand and the market’s anticipation of continued deficits.

The silver-to-gold ratio is another indicator that hints at potential price shifts. The current ratio is over 88:1, far above the historical range of 40:1 to 60:1. Analysts suggest that a correction toward this average could lead to a significant rise in silver prices, especially as the market braces for prolonged supply deficits.

FULL DISCLOSURE: First Majestic Silver Corp is a client of Canacom Group, the parent company of The Deep Dive. The author has been compensated to cover First Majestic Silver Corp on The Deep Dive, with The Deep Dive having full editorial control. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security.