Like many gold and silver miners, MAG Silver Corp. (NYSE: MAG) has fallen precipitously over the past few months, falling more than 45% between March highs of $19.58 and recent lows of $10.32. For reference, the VanEck Gold Miners ETF (GDX) fell by a similar amount, from over $41 to under $25.
I think MAG Silver could be close to a tradable low, with significant catalysts on the horizon. I would encourage investors to use this deep pullback to accumulate stocks, as MAG is trading at a significant discount to its peers, assuming the mine ramps up by 2023.
Introduction to MAG Silver
MAG Silver is a Canadian silver developer focused on advancing the Juanicipio project, which is being developed with Fresnillo Plc (OTCPK: FNLPF). MAG Silver owns 44% of the project and Fresnillo owns 56% and is the operator.
MAG Silver is a 20 year mining journey
MAG Silver is one of those rare mining companies that can take a mining project from initial drilling to production. As my mentor Mr. W taught me many years ago, about 1 in 10 minors ‘projects’ progress towards a resource, while 1 resource out of 10 is ‘economic’. Finally, 1 economic resource out of 10 is transformed into a mine. So MAG Silver is essentially a 1 in 1,000 success story that took 20 years to come to fruition. Figure 1 shows a 20-year chart of MAG Silver on Canadian exchanges.
The Juanicipio property and its potential were first recognized in the late 1990s by a mining consultant. Subsequently, MAG Silver raised capital through an IPO in 2003 (at C$0.50/shr) to acquire the property and begin exploration drilling.
Significant intersections of silver and gold were encountered early in the drilling and in 2005 MAG Silver was approached by Peñoles, the predecessor of Fresnillo Plc., to participate in the project. With exploration expenditures of $5 million, Fresnillo was able to acquire a 56% interest in the property in 2007.
In 2008, in the depths of the financial crisis, Fresnillo attempted to take over MAG Silver with a hostile takeover bid of US$4.54. However, as Fresnillo was a 19.8% shareholder of MAG Silver at the time, and was unwilling/unable to provide information to MAG Silver so that the board could make an assessment independent of the takeover proposal, MAG Silver sued Fresnillo in international court. International Chamber of Commerce (“ICC”) arbitration panel to prevent the hostile takeover bid. Eventually, in 2011, the court unanimously sided with MAG Silver and upheld the shareholder standstill clause that protects MAG Silver from new opportunistic takeover bids by Fresnillo.
After the failed takeover attempt, MAG Silver and Fresnillo mended their relationship and continued to explore and develop Juanicipio under their joint venture agreement.
This culminated in the formal approval in 2019 of the Juanicipio Mine Development Plan finalizing Fresnillo as the Engineering, Procurement, Construction Management (“EPCM”) developer and operator of the mine on behalf of the JV.
Juanicipio is a silver giant
The Juanicipio project is located adjacent to the Fresnillo mine (Mina Proaño), owned and operated by Fresnillo Plc. (Figure 2). The Fresnillo mine is widely regarded as one of the most profitable silver mines in the world due to its exceptionally high grade, with an average reserve grade of 265 g/t silver and 0.76 g/t silver. ‘gold. Silver mining has been conducted in the Fresnillo mine area since the 1550s and has produced over 3.3 billion cumulative ounces of silver.
According to MAG Silver’s 2017 Preliminary Economic Assessment (“PEA”) report, the Juanicipio project has a global resource of 267 million ounces of silver and 1.4 million ounces of gold, as well as significant amounts of lead, zinc and copper (Figure 3). The peculiarity of Juanicipio is that the majority of the resource is located in the Bargain area, where grades reach 560 g/t silver and 1.9 g/t gold, as indicated. That’s potentially $350/t in rock revenue (using $19 an ounce of silver), on silver value alone!
Juanicipio’s exceptionally high grade led to stunning economics in the PEA report, as summarized in Figure 4. Using a base silver price of $17.90 and a gold price of 1,250 $, the 2017 PEA envisions the project with an after-tax IRR of 44% and an NPV of $1.1 billion and an all-in sustaining cost (“AISC”) of $5.02/oz silver. At current gold and silver prices ($1700 and $19 respectively), one would expect the NPV to be significantly higher.
Mine development nearing completion
MAG Silver and Fresnillo are currently developing Juanicipio as an underground mine with a 4,000 tpd processing plant. Although the 2017 PEA projected that Juanicipio would produce 9.6 million ounces of silver and 39,000 ounces of gold per year over the mine’s 19-year life, Fresnillo, the operator, is developing Juanicipio to supply 11.7 million ounces of silver and 44,000 ounces of gold per year.
The construction of the plant was completed in December 2021, however, the commissioning of the plant was delayed due to the Mexican public electricity company ‘Comisión Federal de Electricidad’ (“CFE“) not having the necessary manpower to supervise the existing installation, supervise the physical connection and approve the failure prevention devices required.
This pushed back the commissioning schedule by approximately 6 months, with MAG Silver now expecting commissioning to take place in mid-2022 and an 85-90% increase in nameplate capacity. by December (Figure 5). The upcoming release of MAG Silver’s second quarter results will be key to see if there is another slip in the go-live schedule.
Despite the delay in commissioning, underground mining of development materials and initial workings has been in operation since Q3/2020. During the last quarter, Fresnillo processed 145,000 tonnes of ‘pre-production waste’ of Juanicipio which was worth $65 million (Figure 6).
Juanicipio on the verge of reaching the Lassonde inflection point
The main reason I’m bullish on MAG Silver is that Juanicipio is about to hit an inflection point in his Lassonde Curve. As shown in Figure 7, there is a general life cycle for mineral discoveries.
Typically, the value/stock price of a mining discovery increases during the discovery phase, as speculators bet on ‘how big can it get’. Once the project size is determined and the project enters the feasibility and development phases, the share price will ‘fallow’, because that’s usually where economic reality, permit delays and cost overruns occur. Finally, when the mine starts producing, the stock price soars, as cash flow begins to flow. MAG Silver and the Juanicipio mine are about to enter the production phase, where the stock reevaluates into a producer status.
Valuing the production
Assuming Juanicipio reaches nameplate capacity by 2023, Wall Street and Bay Street analysts expect the company to generate revenue of $280 million and EPS of $1.17 (Figure 8) . At a recent stock price of $11, that’s less than 10x Fwd P/E.
In fact, MAG Silver compares well to silver mining peers trading at 13x and 37x 2023 Non-GAAP P/E respectively (Figure 9). Based on the 2024 non-GAAP P/E, MAG is a strong buy, trading at 8.4x P/E against peers ranging from 15-27x.
The seasonality of silver is in focus
Another catalyst ahead is the strong seasonality of investments in precious metals. Silver tends to have a very pronounced seasonal bottom in July (Figure 10).
I think the upcoming FOMC meeting on July 26-27 could be an important catalyst. Given that oil and gasoline prices have weakened significantly since June, it is highly likely that the Federal Reserve will only raise interest rates by 75 basis points at the July meeting. Additionally, if inflation has indeed peaked, there may be less pressure for the Federal Reserve to continue raising interest rates at a rapid pace.
Risks for MAG Silver
The biggest risk for MAG Silver is a further commissioning delay for the Juanicipio mine. As we indicated in Figure 5, go-live was scheduled to begin in the second quarter of 2022, and this should have been a significant event deserving of a press release. Since there is no news from the company, it must be assumed that there has been some lag in the schedule.
Additionally, gold and silver prices are obvious risks for commodity producers. However, MAG Silver is somewhat protected given the extremely high grade of Juanicipio ore. At an estimated AISC of $5/oz silver, even if silver prices were to fall precipitously, other producers would have to shut down production well before it affects MAG, which should provide a floor to the price. money.
In conclusion, I think investors should use this deep MAG Silver pullback as a buying opportunity for the producer’s upcoming revaluation. It’s only a matter of when, not if, MAG Silver becomes a major silver producer.