Junior Canadian Silver Miner Shares MAG Silver (NYSEMKT: MAG) rose 16% in the first half hour of trading on April 27. Although the company’s mining efforts in Mexico have been disrupted by the COVID-19 containment efforts (news announced about a week ago), the company has just secured a capital of C $ 60 million – injection of dollar liquidity of a significant shareholder. This is a very big deal for this little precious metal miner.
MAG Silver isn’t much of a miner at this point. This is not an affront, just to underline the fact that he is still building his first mine, the Juanicipio project in Mexico. It is a joint venture with Fresnillo plc, which operates the project. MAG Silver holds a 44% stake in Juanicipio. As reported, the mine’s progress has slowed due to social distancing restrictions in this country. This is not terrible, as it will delay the completion of the project, but it does not really affect the income, since the mine does not produce any money. In fact, MAG Silver’s income statement has had no income for the past two years, just expenses.
It’s not unusual in situations like these, but building a mine costs a lot of money and MAG Silver takes 44% of the costs. It is true whether or not the mine is built a little earlier or a little later. MAG Silver entered 2020 with C $ 72 million in cash on the balance sheet, up from C $ 130 at the start of 2019. With a year or two of construction ahead, cash flow was going to become an issue at some point, although business has no debt. So when news broke that Eric Sprott bought C $ 60 million of MAG Silver shares, investors reacted positively. It should be noted that Sprott Investments already had a significant stake in the miner. While MAG Silver is not strapped for cash, the extra cash will certainly make it easier to continue paying for the costs of building Juanicipio.
MAG Silver is essentially a bet that the Juanicipio mine will be built and produce silver according to project expectations. At this point, that includes a 19-year-old mine line and all-in sustaining costs of around $ 5 per ounce of silver. Still, there are a lot of things that could go wrong from here, including construction headaches (like COVID-19 delay), falling hardware prices for silver, mine below profitability expectations, or MAG Silver cannot finance its share of Development costs. While the latter isn’t as big as it was just a few days ago, the takeaway here is that MAG Silver is not a suitable investment for conservative investors. However, after the cash injection he just received, the more adventurous types might want to take a deep dive.
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