First Majestic Silver Has 80% Downside: Kerrisdale's Latest Short Report

First Majestic Silver Corp AG, a mining company that focuses on silver production, exploration, and development in Mexico is an "absurdly overvalued", "heavily promoted" stock that has been driven by a "speculative frenzy," according to Kerrisdale Capital.

Silver's Ride

Kerrisdale Capital began its short thesis on First Majestic by pointing out that like all mining companies, First Majestic's stock price is obviously tied to the commodity it explores. The company's stock fell 90 percent from the peak of the silver market in 2011 to recent lows. On the other hand, the stock seems to have "gotten a new lease on life" and surged 268 percent since the start of the year, marking an increase eight times larger than the actual gains silver notched.

As such, Kerrisdale estimates the stock is now trading at 5x its net asset value, which marks an "astonishing" premium to its peers and a "gross violation of common sense."

Related Link: A First-Place Medal For This Silver ETF, Up 280% In 2016

In addition, the market tends to price miners at just 17 percent of the spot value of their measured and indicated mineral resources that still need to be sold over the years. Somehow the market is pricing First Majestic at a "whopping" 77 percent of this value.

Kerrisdale also stated First Majestic's stock price is now 17 percent higher compared to the last time the price of silver was it its current level. However, its silver reserves per share are now 30 percent lower than it was in the past.

What Happened?

Kerrisdale said First Majestic's CEO is a self described "high-level visionary" and has incorrectly predicted for years that the price of silver will surge above $100 per ounce. He also claims that precious-metal prices are trading at an unsustainable low price due to "price manipulation" by big banks.

The CEO also happens to be a former stock promoter himself, which helped to attract retail investors.

Bottom line, the surge in First Majestic's stock doesn't necessarily look out of line considering the "eye-popping returns" its peers have seen in recent months. In reality, the stock is "no so untethered from reality that it has become less a bet on silver than a bet on the sustainability of First Majestic's own hype."

Kerrisdale estimates that First Majestic's stock price should "re-rate downward by 70-80 percent."