There is no question at this point that inflation is everywhere.

July 13 (King World News) – Peter Boockvar:  Both headline CPI and the core rose .9% m/o/m, well more than the estimate of up .5% and .4% respectively.

We are seeing a reacceleration in service price inflation now combined with aggressive goods price inflation. Versus last year where the easy comp thing is rolling off, the headline gain was 5.4% and the core rise was 4.5%.

Energy prices jumped 1.5% m/o/m and food prices were higher by .8% m/o/m. Comparing headline CPI for June 2021 vs June 2019, they are up 6%. As for the core rate, it is higher by 5.7%. So forget about the Fed’s 2% target, we are now essentially running at a 3% annualized CPI rate ex food and energy.

With respect to services, ex energy prices rose .4% m/o/m and are running at a 5.1% annualized rate over the past 4 months. While Apartment List said rent growth was 2.3% in June from May, the BLS said it was just .2% while Owners’ Equivalent Rent was higher by .3%. Thus, expect a real pick up in the quarters to come in rent inflation for those that think this is just temporary. As Americans hit the road with the reopening, motor vehicle insurance prices jumped 1.2% m/o/m after a .7% gain in May and a 2.5% spike in April. They are up 11.3% y/o/y. Airfares rebounded by 2.7% and are higher by 25% y/o/y. Hotel price spiked by 7% m/o/m and are up 15% y/o/y. Medical care kept a lid on things with prices down by .1% m/o/m and up just .4% y/o/y because of declines in prescription drugs. Healthcare services though saw price gains in the month across the board…

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Core goods prices jumped 2.2% m/o/m after a 1.8% rise in May and 2% increase in April and are now up 8.7% y/o/y.

Used car prices led the way with a 10.5% monthly increase alone in June. Used car prices likely have topped but off obviously very high levels as they are up 45% y/o/y. New car prices rose by 2% in June after a 1.6% gain in May. They are now up 5.3% y/o/y. Most things related to the home like major appliances, floor coverings, window coverings, furniture/bedding, bedroom furniture and laundry equipment also saw sharp price gains in the month. Apparel prices, as we are finally shopping again, rose .7% m/o/m after a 1.2% increase in May.

Bottom line, core CPI is now running at an annualized pace of 8.4% in the past 4 months and I argue that the price increases being passed on to the rest of us is really only beginning. Rental increases will continue to drive higher service prices and goods price increases will last all thru at least this year and I believe well into 2022. I’ll repeat again, service inflation is NEVER temporary outside of 100 yr pandemics so the direction of goods prices is the only relevant variable to the overall inflation equation.

With respect to the Fed, any government official likes to have a plan and act on their own timing. Inflation stats like this that are not stopping, will throw the Fed’s plans out the window. I repeat my expectations of a July FOMC meeting announcement that tapering will begin in September. How can it not with inflation prints like this?

Inflation expectations in the TIPS market are jumping in response. The 5 yr breakeven is higher by 6 bps to 2.57% and is at a 5 week high. The 10 yr breakeven is higher by 2.5 bps to 2.36%.

Also of importance…

Eric King:  “Chris, your company is widely recognized as one of the best silver companies in the world. How well is the company positioned going forward?”

Chris Ritchie:  Thanks Eric, we do believe that we’re very well positioned at the moment and for the long term.  I think some of the weakness we’re seeing now is a misunderstanding of that dreaded Lassonde Curve time within the development cycle.  Ironically we have tried to structure the company and the stock itself to perform well as we build. It’s a short construction cycle and we anticipate first pour being in Q2 2022 and we have years of drilling for growth ahead of us.

Fully Funded
I’ve been getting a lot of questions about our balance sheet and whether or not we need more capital.  The answer is no.  We have over $200m US in cash on the balance sheet plus $90m US of available debt of which we intend to draw at least $60m of that.  This compares with our capital needs of $138m as laid out in our feasibility study for the building of our process plant, underground development, our on site camp and the power line.  Some people aren’t aware that ~$77m of this spend is in the form of a fixed price contract that we have with Ausenco which means that barring some out of the ordinary change, any over runs are paid for by them.

We have made substantial progress with the remaining components of the spend that we’re responsible for so as each day passes, the amount we’re responsible for shrinks and when thinking about the impact to a 10% or 20% over run is very small relative to our working capital.  Again, we wanted to give investors confidence that we could whether a severe financial storm while still encouraging our exploration team to go out and grow. 

A Very Different Silver Investment Vehicle
We also wanted to create a very differentiated investment vehicle that would be incredibly appealing to shareholders and potential shareholders.  There are very few names with over 50% silver production out there and even less that are 100% precious metals.  Our Feasibility Study outlines an all in sustaining cost of less than $7.00 / oz of silver equivalent and a payback period of less than one year if you assume $19 silver and $1500 gold.  Combine that with our balance sheet and a team that has done this before, we provide best in class defense.

We also intend to be in production ~7 years after our first drill hole vs an industry average in the 20 year range.  We have 15 veins at Las Chispas in our Feasibility Study and 34 veins and counting that are not.  This hopefully allows us to have above average growth as well without the dilution.  Unfortunately mining is a capital intensive business and we wanted to be as efficient with our capital as possible.  Up until the start of construction we were able to add $7 of value to our enterprise value for every $1 spent.  Our growth focus now is to find high grade ounces in and around our existing mine plan so that we can potentially improve the first few years of the mine plan.

Up until now, our finding cost per ounce has been near $1.  Anything near that cost for new ounces given that the capital for the mine has been raised and accounted for adds significant value that drops to the bottom line.  Hopefully we can boost our already very attractive cash flow profile in the early days all the while increasing the time period our exploration team has to continue to grow the project.  In a world without much yield, we wanted to create something that was as close to a convertible bond as a mining stock could be at our stage while offering exposure to a vehicle that could perform very well in an inflationary environment. SilverCrest Metals, symbol SIL in Canada and SILV in the US.

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