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As Prices Rise, 3 Trades For Precious Metals Miner First Majestic Silver

By (Tezcan Gecgil/ )Stock MarketsNov 08, 2021 09:19AM ET
As Prices Rise, 3 Trades For Precious Metals Miner First Majestic Silver
By (Tezcan Gecgil/ )   |  Nov 08, 2021 09:19AM ET
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  • First Majestic Silver stock is flat for the year, but returned over 25% in the past month.
  • AG is a play on the price of silver, which is also up about 12%
  • Those who want to buy silver could regard AG stock as a proxy for the volatile metal and invest for the long-run, especially if the price goes toward $13 in the short term

Long-term investors in Canada-based silver miner First Majestic Silver (NYSE:AG) do not have much to show in the way of growth this year. For 2021 year-to-date (YTD) AG shares are up only 0.25%. By comparison, so far in 2021, silver, which is both a precious metal and an industrial commodity, is down about 9.6%.

AG Weekly TTM
AG Weekly TTM

AG stock is currently at $13.42. It hit a multi-year high of $24.01 on Feb. 1. The 52-week range for the stock has been between $9.62-$24.01.

The decline since February came to a halt on Oct. 5, when shares reached an intraday low of $10.45. Since then the stock has returned well over 25% while the companys market capitalization stands at $3.44 billion.

Readers might be interested to know that shares of another silver miner, Pan American Silver (NASDAQ:PAAS), are down about 24.7% in 2021. However, the move in PAAS stock between Feb. 1 and Oct. 5 mirrors that of AG shares.

The recent bull run in silver miners also corresponds to the up move in silver. Wall Street typically uses miners as a proxy for both the up and the down activity in the price of silver as well as gold, both of which have, until recently, been under pressure.

First Majestic Silver, which operates mines in the US and Mexico, released Q3 metrics in recent days. Lower metal prices as well as increased costs during the quarter have affected the miner’s performance. Revenue was “$124.6 million, representing a 1% decrease due to the decision to withhold 1.4 million ounces of silver in inventory in an effort to maximize future profits.” Loss per shares came in at 7 cents. A year ago, First Majestic Silver had reported adjusted earnings per share (EPS) of 5 cents.

On the results, CEO Keith Neumeyer said:

"During the quarter, we also invested in two significant capital projects at Jerritt Canyon which temporarily increased our all-in sustaining costs at the site. With the majority of these investments now complete, we expect a reduction in costs starting in the fourth quarter driven by higher production, reduced capital costs and continued improvements in operating efficiencies.”

What To Expect From AG Stock

Among 6 analysts polled (via CNN), the stock has a 'hold' rating. The shares have a 12-month median price target of $15.05, implying an increase of about 12% from current levels. The 12-month price range currently stands between $10.63-$25. In other words, despite the recent rally in AG shares, Wall Street remains optimistic for further upside.

Meanwhile, the stock’s P/E, P/S and P/B ratios stand at 89.12x, 6.93x and 2.47x. By comparison, the metrics for PAAS stock are 18.36x, 3.69x and 2.07x.

Readers who watch technical charts might be interested to know that AG’s technical picture has been improving in recent weeks. However, given the extent of the current up move, there could be some profit-taking in the coming days. The $14 level should act as resistance.

Our expectation is for First Majestic Silver to give up some of its recent gains and move toward $13, or even below. In such a case, there should be strong support around $12.65. Afterward, the shares would likely trade sideways while it establishes a new base, and possibly starts a new leg up.

3 Possible Trades On First Majestic Silver

1. Buy AG Stock At Current Levels

Investors who are not concerned with daily moves in price and who believe in the long-term potential of the company could consider investing in First Majestic Silver stock now.

AG stock is currently at $13.42. Buy-and-hold investors should expect to keep this long position for several months, if not multiple quarters, while the stock makes an attempt at a new record high, possibly mirroring increases in the price of silver.

Readers who opt for this approach, but are concerned about large declines, might also consider placing a stop-loss at about 3%-5% below their entry point.

2. Buy An ETF With AG As A Main Holding

Many readers are familiar with the fact that we regularly cover exchange-traded funds (ETFs) that might be suitable for buy-and-hold investors. Thus, readers who do not want to commit capital to First Majestic Silver stock but would still like to have substantial exposure to the shares could consider researching a fund that holds the company's stock.

Examples of such ETFs include:

  • iShares MSCI Global Silver and Metals Miners ETF (NYSE:SLVP): The fund is down 16.6% YTD, and AG stock’s weighting is 7.25%;
  • Global X Silver Miners ETF (NYSE:SIL): The fund is down 13.4% YTD, and AG stock’s weighting is 4.90%;
  • VanEck Junior Gold Miners ETF (NYSE:GDXJ): The fund is down 17.5% YTD, and AG stock’s weighting is 3.05%;
  • VanEck Gold Miners ETF (NYSE:GDX): The fund is down 9.1% YTD, and AG stock’s weighting is 1.25%.

3. Cash-Secured Put Selling

Investors who are bullish on the stock, or would consider buying First Majestic Silver shares at a level less than the current price could consider selling a cash-secured put option in First Majestic Silver stock—a strategy we regularly cover. As it involves options, this set-up will not be appropriate for all investors.

A put option contract on AG stock is the option to sell 100 shares. Cash-secured means the investor has enough money in his or her brokerage account to purchase the security if the stock price falls and the option is assigned. This cash reserve must remain in the account until the option position is closed, expires, or the option is assigned, which means ownership has been transferred.

Let's assume an investor wants to buy First Majestic Silver stock, but does not want to pay the current price of $13.42 per share. Instead, the investor would prefer to buy the shares at a discount within the next several months.

One possibility would be to wait for First Majestic Silver stock to fall, which it might or might not do. The other possibility is to sell one contract of a cash-secured AG put option.

So the trader would typically write an at-the-money (ATM) or an out-of-the-money (OTM) put option and simultaneously set aside enough cash to buy 100 shares of the stock.

Let's assume the trader is putting on this trade until the option expiry date of 21 January 2022. As the stock is $13.42 at time of writing, an OTM put option would have a strike of $13.

So the seller would have to buy 100 shares of First Majestic Silver at the strike of $13.00 if the option buyer were to exercise the option to assign it to the seller.

The AG 21 January 2022, 13-strike put option is currently offered at a price (or premium) of $1.03.

An option buyer would have to pay $1.03 X 100, or $103, in premium to the option seller. This premium amount belongs to the option seller no matter what happens in the future. The put option will stop trading on Friday, Jan. 21.

Assuming a trader would enter this cash-secured put option trade at $13.42 now, at expiration on Jan. 21, the maximum return for the seller would be $103, excluding trading commissions and costs.

The seller's maximum gain is this premium amount if AG stock closes above the strike price of $13.00. Should that happen, the option expires worthless.

If the put option is in the money (meaning the market price of First Majestic Silver stock is lower than the strike price of $13.00) any time before or at expiration on Jan. 21, this put option can be assigned. The seller would then be obligated to buy 100 shares of AG stock at the put option's strike price of $13.00 (i.e., at a total of $1,300).

The break-even point for our example is the strike price ($13.00) less the option premium received ($1.03), i.e., $11.97. This is the price at which the seller would start to incur a loss.

Cash-secured put selling is a moderately more conservative strategy than buying shares of a company outright at the current market price. This can be a way to capitalize on the choppiness in AG stock in the coming weeks.

Investors who end up owning First Majestic Silver shares as a result of selling puts could further consider setting up covered calls to increase the potential returns on their shares. Thus, selling cash-secured puts could be regarded as the first step in stock ownership.

As Prices Rise, 3 Trades For Precious Metals Miner First Majestic Silver

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As Prices Rise, 3 Trades For Precious Metals Miner First Majestic Silver

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