Wednesday, November 23, 2011
The Hera Research Newsletter (HRN) is pleased to present an incredibly powerful interview with Keith Neumeyer, Chief Executive Officer, President and Director of First Majestic Silver Corp. (TSX:FR / NYSE:AG). Mr. Neumeyer began his career at the Vancouver Stock Exchange and worked in the investment community for 26 years beginning his career in a series of Canadian national brokerage firms including McLeod Young Weir (now Scotia McLeod), then Richardson Greenshields and then Walwyn Stogell McCuthchen (which became Midland Walwyn).
Mr. Neumeyer moved on to work with several publically traded companies in the natural resource and high technology sectors. His roles have included senior management positions and directorships in the areas of finance, business development, strategic planning and corporate restructuring. Mr. Neumeyer, who has listed a number of companies on the Toronto Stock Exchange, has extensive experience dealing with financial, regulatory, legal and accounting issues.
Hera Research Newsletter (HRN): Thank you for joining us today. Let’s begin by talking about silver supply and demand.
Keith Neumeyer: Silver mine production was around 736 million ounces in 2010. Demand was around 1 billion ounces. Scrap silver recycling and some government sales filled the gap. We’re at historic lows in terms of above ground silver. Eric Sprott recently said there are 1 billion ounces of triple nine silver left aboveground. Unlike gold, silver gets used. We’re at historic highs in supply when it comes to gold, but the exact opposite is true for silver.
HRN: Is there a deficit in terms of mine supply?
Keith Neumeyer: We’ve had a supply deficit for the past 13 years. 2009 was the first year we created equilibrium. We only went into a surplus in 2010, in terms of industrial and jewelry fabrication demand. The surplus mine supply was purchased by investors, obviously. A lot of mining companies are showing lower production because a lot of silver comes from base metals and, with lower base metals prices, it’s becoming more difficult. I don’t see any major supply drivers for silver in the next several years.
HRN: Do you expect more scrap silver to enter the market?
Keith Neumeyer: That’s what happened in 2009 when gold rallied over $1,200 and then corrected to below $1,100. It was primarily caused by scrap gold entering the market. I believe the same thing was happening for silver. We’ll see that again as the metals make new highs. It’s the same as a stock. You replace part of the shareholder base at different levels. (more)
Back in February, I wrote a post called Why are WTI and Brent Prices so Different? In it, I talked about a number of issues, including pipeline issues, contributing to the differential between Brent oil prices (high) and West Texas Intermediate oil prices (low).
Recently, I have had some additional insights into what is happening that I would like to share with others. These include:
1. The WTI / Brent oil price differential has, in fact, led to lower prices on oil products in the United States than the rest of the world, and has helped (at least a little) to keep the United States out of recession.
2. As a corollary to (1), if we can fix the WTI/Brent price differential, it will mean, at least initially, higher prices for oil products for US consumers. It may also cause the US to slide into recession, lowering oil prices for both WTI and Brent.
3. The situation giving rise to the WTI/price differential may be more complex than just lack of pipelines. Part of the issue may be limited refinery capacity to handle the heavier, sourer oils (even though, ironically, neither WTI nor Brent is heavy or sour). If this is the case, even if the WTI /Brent price differential is fixed, heavy sour grades may still trade at a big discount to light sweet grades, so the problem may be transformed to a new problem, not eliminated.
In this post, I will explain these observations.
What is happening to Brent and WTI prices?
The first question we might ask is, “Is Brent price high, or is WTI price low, or is it a combination?” To look at this, I compared both prices to the world average oil price, as calculated by the US Energy Information Administration.
Figure 1. Comparison of WTI, Brent, and world average oil prices, based on EIA data.
The answer seems to be primarily that WTI has fallen relative to world oil prices. Figure 1 shows that during 2010, both WTI and Brent prices tended to be a little higher than the world average oil price. Starting shortly after the beginning of 2011, Brent rose a bit relative to the world oil price–about $1.60 per barrel higher relative to the world oil price, while WTI dropped below the world average oil price. On average, WTI has averaged $15.75 lower than would be expected during 2011, based on 2010 relativities and the average world oil price. (more)
Normally central banks fix only short-term interest rates but these are not normal times. Government bonds that were considered risk-free when financial institutions acquired them, and are still treated as such by the regulators, have turned into the riskiest of assets.
Italian and Spanish bonds are viewed as too risky to buy with a yield of seven percent because they are regarded as toxic, and the yield could just as easily rise to 10 percent. Yet the same bonds would be attractive long-term investments in the current deflationary environment, at say four percent, as long as the excessive risk is removed by imposing a five percent ceiling on interest rates.
The interest rate ceiling should be regarded as an emergency measure. In the medium term it could encourage politicians to abandon fiscal discipline." - George Soros
By almost any measure, this carbonated beverage is king of the hill of brand loyalty. What separates Coca-Cola (NYSE:KO - News) from most other companies is that it has proven its durability through the passage of time. It was 125 years ago, when pharmacist John Pemberton mixed his syrup with carbonated water at Jacob's pharmacy in Atlanta, Ga. That original concoction sold for a nickel a glass, and sales averaged nine per day for the first year.
The company now sells over 500 brands in more than 200 countries, making it the first truly global brand. It's now the most recognized trademark in the world and the flagship product is still based off the same carbonated drink created in Atlanta, Ga. While the company did experiment in 1985 with a formulation known as "New Coke," it turned out to be a marketing disaster. Within a few months, company management reversed course and reintroduced "Classic Coke," made from the original secret formula. They've never looked back.
Daily sales volume now numbers 1.7 billion, and the brand has evolved into a generic name, used around the world. When many people order a cola drink, they simply ask for Coke, whether it's available or not. Coke is a cultural phenomenon that has spawned hit songs and a treasure trove of old signs, coolers and other marketing items hunted by avid collectors.
The reach of Google (Nasdaq:GOOG - News) may now surpass even that of Coke, but who knows what this company will look like in over a hundred years. In the meantime, Google has become synonymous with internet search engines, gobbling up 65.6% of the U.S. search market, based on comScore rankings for Oct. 2011. It's clearly the gorilla in the room, leaving second-place Yahoo far behind at 15.2%.
During the month, Google accounted for 11.9 billion of the roughly 18 billion searches that were conducted. Again, it crushed the competition, with Yahoo and Bing logging 2.7 billion searches each.
When the first plain paper photocopier was introduced by Xerox in 1959, the xerographic process invented by Chester Carlson became the standard of a dynamic new industry. "Xerox" became a verb, even if you were making a copy with another company's machine. Google now finds itself in the same position, as "Google it" has become the go-to method for searching the internet. Xerox lost its luster, so it remains to be seen how long Google can maintain its current dominance.
It's hard to imagine a world without Mickey Mouse, Donald Duck, Snow White, Tinker Bell, Bambi, Winnie the Pooh and hundreds of other memorable characters. What started as a small cartoon studio in the 1920s, has grown into a sprawling entertainment and merchandising empire that circles the globe. Disney (NYSE:DIS - News) now has a giant presence in film making, television, hotel resorts, vacation clubs and cruise ships. Besides its two major theme parks in California and Florida, it has opened parks in Tokyo, Paris and Hong Kong.
Disney is a classic American brand, recognized and admired almost everywhere on the planet. The vision of founder Walt Disney permeates the company and everything it produces. No child will ever forget their first visit to Disneyland or Disney World; mere mention of the name will bring a smile to the face of a child touched by a Disney experience. With annual revenues of $40 billion and net income of almost $5 billion, no other company in this industry even comes close.
It's not an overstatement to say that owners of Apple (Nasdaq:AAPL - News) products are passionate and can be borderline obsessive. Many of them won't even consider buying an electronic device that doesn't have the famous bitten apple logo, and they don't seem to mind that Apple products usually cost more than the competition. This is just the way Steve Jobs wanted it, and it's no accident. Subscribing to the "less is more" theory of product marketing, he created and designed products that people wanted, before they knew they needed them. His products defined the consumer, not the other way around.
All you have to do is review the statistics to see how powerful this brand is. In the company's last quarter, according to the Guardian, Apple sold 17.1 million iPhones, 11.1 million iPads and 4.9 million Macintosh computers. That was the best quarter ever for the venerable Mac. The new iPhone 4S sold more than 4 million units during the first weekend on the market, the most ever for any phone. Those are impressive statistics, for a company that was given up for dead just 15 years ago, and ample proof that design purity and magic can work wonders in the marketplace.
The Bottom Line
There are many other companies that could easily make this list. Coffee drinkers love their Starbucks (Nasdaq:SBUX - News), a company that started a coffeehouse revolution and made the beverage a branded fashion statement. The Nike (NYSE:NKE - News) swoosh seems to appear on sportswear everywhere, and you don't need to see the name of the company to know who made it. Then there are the Bimmer (or Beemer) devotees, who wouldn't own another car under any circumstances. Why should they settle for anything less than the performance and aggressive styling of the "ultimate driving machine?"
Addictive brands are more than just wildly popular; they turn industries and traditions on their heads. They innovate and reinvent the wheel. They don't react to cultural shifts; they cause them. Among their competitors, they stand out in a crowd and make us gasp at their creative spirit. Anyone care for a grande, extra-hot, triple nonfat, decaf, two-pump vanilla, no-foam latte, with cinnamon and chocolate sprinkles in a double cup?
Transcript from Bloomberg TV
On the U.S. going into a double-dip recession:
"I am worried. We've had two bits of unfavorable news in the last 24 hours. One you reported this morning, which is that we have less economic momentum than we thought we had - 2% growth as opposed to 2.5%. The second is that yesterday we had no policy momentum. We're worried about the concept of stall speed, that 2% growth may not be enough for an economy that still has to de-lever. We put the chance of a recession at one-third to one half, which is really high given initial conditions."
On policy makers in Washington, D.C.:
"[Policy makers] are totally off the track. It's not a failure to agree on medium-term fiscal reforms, it's also a failure to give air cover for other things that need to be done -- in housing, in the labor markets, in credit. We have no policy momentum. Let me tell you what I find most terrifying: we’re having this discussion about a risk of recession at a time when unemployment is already too high, at a time when a quarter of homeowners are underwater on their mortgages, at a time when the fiscal deficit is 9%, a time when interest rates are at zero."
On what factors could be driving a double-dip recession:
"This is a fragile economy. It doesn't mean we don't have strength, we certainly do - the corporate sectors are as strong as we have ever seen it in terms of balance sheets. We have incredible entrepreneurial spirit. But we're facing all these structural headwinds, and the big concern is the possibility of us being tipped over by Europe. Things in Europe, as you mentioned a few minutes ago, are getting worse, not better."
On solutions in the U.S.:
"Unlike Europe, the U.S. doesn't face an engineering problem - it faces a political problem. The solution is not an engineering nightmare. You can actually put it on paper and get it done. But it's been a political nightmare. What we'd like to see is the political class to come together and agree on the steps that need to be taken."
"As you have heard us say over and over again, Bill Gross has been saying it, I've been saying it, other PIMCO colleagues have been saying it -- it's structural in nature. We need medium term structural reforms to increase the growth potential and job creation potential of this economy. We can do it. This is different from Europe. Europe has both a political problem and an engineering problem. Our problems are small relative to Europe, but if we wait they will become larger."
On the S&P's statement that US rating is unaffected by the supercommittee:
"That is what S&P is telling us. We have to remember that S&P still has us on negative outlook which means unless things improve over the next three years, there could well be another downgrade. The ratings agencies in general are in a very tough position. We talked about at PIMCO's investment committee yesterday. They've been beaten up a lot, both for what they have done and for mistakes that disrupted the markets for a while. It is hard to be a ratings agency today. You have to read these comments in that context. They are under fire."
On Joseph Stiglitz's comments that austerity measures make the crisis worse:
"I think [Stiglitz] is right, in the sense that the muddled middle, where Europe has been, is no longer sustainable. The crisis that started in the outer periphery, Greece, not only has shifted to the inner periphery and the outer core, Spain and Italy, but it has also impacted France which is the inner core."
"Europe needs to make a choice if it wants to save the euro, and it should save the euro. There's only two choices: one is a full fiscal union, a political decision with a very large bill. The other [choice] is a smaller, less-than-perfect euro zone, which has political implications but has a smaller bill. That is a political decision that Germany must take. The quicker it takes it, the more likely it will be able to save the euro."
On the options that could save Europe:
"There are no easy options. That's why the process is paralyzed. Wherever the policy makers look, they see tremendous costs and tremendous disruptions. The tendency has been to do too little, too late. There is no costless way forward at this point, and that is a problem that all of us have to internalize and understand, that there are no easy solutions."
On Europe being the single biggest threat to the U.S. economy:
"Left to our own, we would muddle along with the risk of stall speed, but one thing we cannot cope with is the major shock from one of the largest economic areas of the world, Europe. Already we're seeing investors stepped back from markets because of the anxiety. The more that happens, the more dysfunctional these markets become."
On whether the Fed should implement QE3:
"I smiled when one of your guests said earlier that the Fed has been the only adult in Washington. That is true. It has been the only institution willing to take steps. As you pointed out, because the Fed has taken these steps, it has taken pressure off of the rest of Washington to do its part…Other agencies haven't stepped up to the plate. It is time for other agencies to step up. The effectiveness of the Fed is declining, unfortunately, day in and day out."
On what the Fed should do:
"Chairman Bernanke has made it clear and he's repeating it three times, saying that when they look at these unconventional policies, they recognize the benefits but there are costs and risks. What we call collateral damage, unintended consequences."
"[Bernanke] recognizes that that equation, that balance, is shifting from potential benefits to costs and risks. Looking forward, if they were to do QE3, they may get some benefits, but I suspect there would also be quite a bit of collateral damage and distortions put into the system that would take us years to overcome."
"[Collateral damage would be] pressure on the currency. What you will see is pressure on the functioning of markets, you will see people stepping back, because more and more non-commercial forces will be determining market outcomes. We will also see questions about the credibility of the Fed and the political autonomy of the Fed."