Last year has been a tough one for the Silver Miners Index (SIL), with the ETF ditching all of its early 2021 gains and starting 2022 in negative territory as well. One name that went against the trend was MAG Silver (MAG), which outperformed for most of 2021, before suddenly dropping all of its earnings as well. This was attributed to a small capital increase and news that full commissioning would be delayed at its 44% owned Juanicipio mine. However, with little change in the long-term outlook, I would view any pullback below $ 13.75 as a low risk area to start a position in the stock.
(Source: Company presentation)
A little over two months ago, I covered MAG Silver, noting that the stock was on track to transition to producer status but the developer —> producer re-rating seemed to have already taken place. . Indeed, the stock was trading at over 2.0 times the NPV (5%), which is a high valuation for a single-asset producer. Since then we have seen two negative developments, with a capital increase of around $ 46 million and the announcement that approval to complete the connection to the national electricity grid in Juanicipio cannot yet be granted, pushing back the in six month factory service. Let’s take a closer look at the company below:
(Source: Company deposits, author’s table)
As noted in my previous article, MAG Silver was a unique story in the precious metals arena, with the company preparing to begin production on its 44% owned Juanicipio project in 2022. As shown in the graph above, Juanicipio was due to be one of the highest producing grade mines in 2022 in the silver space, with an equivalent silver content of approximately 468 grams per tonne. This would place the company in the top 5 producers in the industry, with higher margins also expected, based on estimated costs of less than $ 6.00 / oz.
(Source: Company deposits, author’s table)
Based on the 2017 preliminary economic assessment, the Juanicipio project was estimated to have an industry-leading 19-year lifespan, with payable production of 18.5 million ounces of money equivalent. [SEOs]. In the first six years (2023-2028), this production profile was expected to reach approximately 24.2 million referrals (100% basis), which would translate into attributable production of over 10 million referrals for MAG Silver. To put that in perspective, this would give MAG Silver a leg up on many of its silver counterparts in terms of production profile, with Endeavor Silver (EXK) expected to produce only around 8 million listings in its three. mines in 2021. This combination of high margins (70% more), and a solid production profile can easily justify a premium multiple for MAG Silver.
Unfortunately, while underground production and commissioning was on schedule, full commissioning has now been pushed back from a previous estimate at the end of 2021. This is based on an update from at the end of December, noting that the Comisión Federal de Electricidad [CFE], the state-owned electricity company, has notified operator Fresnillo (OTCPK: FNLPF) that approval to complete connection to the national electricity grid cannot yet be granted. This is due to a shortage of CFE staff due to COVID-19, limiting CFE’s ability to review the existing facility, oversee the physical connection to the power grid, and approve required power failure prevention devices. Full commissioning activities have been pushed back to May at the earliest, based on the current schedule.
The good news is that blasting and mine development work will continue, and Fresnillo plans to make excess plant capacity available to Minera Fresnillo and Minera Saucito to process mineralized material at Juanicipio. This could reduce Juanicipio’s cash flow deficit while the two companies await CFE approvals. Therefore, while this is certainly a setback, it does not change MAG Silver’s long-term thesis. However, given industry-wide delays in commissioning and permits due to COVID-19, this news shouldn’t be too surprising. In fact, that was one of the reasons it made sense not to chase the stock above $ 20.00 in November.
Based on the updated schedule, it appears silver production is expected to hit less than five million ounces in fiscal 2022 before approaching the 10 million ounce mark by the next year. fiscal year 2023 during the highest grade years of mine life, with silver grades estimated to be over 800 grams per tonne in year 2. Given this development, the annual BPA estimates fell to $ 0.70 for fiscal 2022, from $ 1.00 before the update. This leaves MAG Silver trading at around ~ 23x earnings estimates for FY2022 as a single asset producer.
As previously reported, in addition to the negative news regarding a delay in full commissioning, MAG Silver completed a capital increase in the fourth quarter, with approximately 2.7 million shares issued at $ 17.15 for approximately 46 million. of dollars. This was a favorable level for raising funds, which certainly improves capital raising, but it resulted in about a 3% dilution of the shares. As a result of the financing, MAG Silver owns approximately 100 million shares, resulting in a market cap of approximately $ 1.46 billion to $ 14.60. If we compare this to my estimated fair value of MAG Silver assets of around $ 1.08 billion, the P / NPV ratio (5%) has improved significantly.
(Source: Company deposits)
As noted below, I have assigned a fair value of $ 880 million to MAG Silver’s 44% interest in Juanicipio, plus an additional $ 150 million of exploration, given that the current mine plan is based on only a fraction of the ownership of the joint venture. In the meantime, I’ve put a conservative fair value of $ 50 million on Deer Trail, given that it’s a very early stage project in Utah. Major intersections at Deer Trail include 1.9 meters of 952 grams per tonne of gold, 38 grams per tonne of gold, with additional base metal credits, and 0.50 meters of 426 grams per tonne of gold, 5.6 grams per tonne of gold and additional base metal credits.
- After-tax NPV (5%), 44% attributable base to Juanicipio = ~ $ 880 million
- Exploration increase 44% attributable to Juanicipio = $ 150 million
- Deer Trail Value = $ 50 Million
= $ 1,080 million
Based on MAG Silver’s roughly $ 1.46 billion market, that leaves MAG Silver trading at around 1.35 times its net present value, which is a reasonable estimate for a company on its way to becoming the one of the cheapest silver producers in the industry. Notably, with the significant income that will be generated by its stake in Juanicipio, MAG Silver will be able to continue to advance Deer Trail without dilution of the shares, which will give it the possibility of losing its status as a sole producer of assets. given moment in the future.
So, is the action a buy?
Based on what I think is a fair value of 1.65 times MAG’s assets and 17 times the earnings estimates for fiscal year 2023 ($ 1.12), I see a fair value of $ 18.43 . This is based on the mix of these two price targets ($ 17.82 + $ 19.04). This indicates an increase of almost 30% from current levels, assuming the mine has no other issues and the mine is operating as intended. This positive upside picture corroborates the technical picture, which shows MAG Silver is trading near the low end of its current trading range. Therefore, a new weakness should present a low risk buying opportunity for a starting position in the stock.
Looking at the technical image above, we can see that MAG Silver appears to have a solid support area at $ 14.25 with its next resistance level only coming in at $ 20.30. This translates into a favorable reward / risk ratio of over 10 to 1, with $ 0.40 down from support and over $ 5.00 up from resistance. However, in the case of triple and quadruple funds, which can be riskier, I would prefer to see this support level of $ 14.25 undercut before entering the action. This is because the more a level is tested, the more likely it is to fail, even if only on an intra-day or intra-week basis. To sum up, while the current pullback offers a relatively low risk buy point, I would prefer to buy the stock on a downside closer to $ 13.75.
(Source: Company presentation)
MAG Silver is one of the best stories in the business, and after a sharp 33% correction, the stock is now approaching a low risk buy zone. However, the key will be to keep that $ 14.25 area, or if it is lost, to regain it quickly. This is because the next level of support only comes closer to $ 11.65. For now, I remain on the sidelines as I see more attractive valuations in the gold space among diversified producers. However, I might consider starting a trade if we see a pullback to $ 13.75.