2023-08-31 22:47:35 ET
Summary
- MAG Silver had a better quarter in Q2, with quarterly EPS up over 100% year-over-year and commercial production declared at Juanicipio.
- In addition, the company reported more encouraging results from its Deer Trail Project in Utah, and is set for a busy H2 drilling season at Larder in Ontario.
- In this update, we'll dig into the Q2 results, recent developments and whether the stock offers enough margin of safety after its near 50% correction.
It was a tough Q2 Earnings Season for the Silver Miners Index ( SIL ) with a theme of lower margins across the board and net losses for some including Guanajuato Silver ( OTCQX:GSVRF ), despite the higher average realized silver price. Fortunately, one name that managed to grow its earnings year-over-year was MAG Silver ( MAG ), with the company benefiting from higher production at its 44% owned Juanicipio Mine in Mexico, which processed ~377,700 tonnes in Q2 (~4.58 million payable silver ounces), up from ~2.21 million ounces of silver in the year-ago period. This translated to significantly higher earnings per share ($0.19 vs. $0.08), and earnings growth is set to continue with commercial production declared in early June. Let's take a closer look at the recent quarter below:
All figures are in United States Dollars unless otherwise noted and production results are on a 100% basis unless otherwise noted.
Q2 Production & Sales
MAG Silver released its Q2 financial results earlier this month, reporting quarterly production of ~4.58 million payable ounces of silver, ~9,500 ounces of gold, ~3,100 tonnes of lead, and ~4,600 tonnes of zinc, translating to revenue of $134.8 million after treatment and refining costs. This translated to a 144% increase from the year-ago period, driven by higher throughput and gold and silver prices, offset by a lower silver grade, and lower base metals prices. Meanwhile, the company noted that Juanicipio declared its much-awaited commercial production on June 1st, 2023, and that the processing facility was running at 85% or higher of its design capacity (4,000 tonnes per day) since commissioning, with nameplate capacity expected to be reached this quarter.
Juanicipio Mine - Quarterly Tonnes Processed (100%), Attributable Silver Production, Attributable Gold Production (x10 for Scale) - Company Filings, Author's Chart
Digging into the production results a little closer, ~377,700 tonnes were processed at an average grade of 498 grams per tonne of silver, with a significant increase in throughput (Q2 2022: ~154,100 tonnes) offset by an 11% decline in grades vs. 567 grams per tonne in Q2 2022. MAG Silver also noted that there continues to be solid progress on development at Juanicipio, with development currently focused on adding three internal spiral footwall ramps to access the full strike of the Valdecanas vein system and on completing construction of the underground warehouse, fuel storage, and pumping station at the mine. To date, ~67 kilometers of underground development has been completed, with ~3.4 kilometers completed during Q2 2023.
MAG Silver - Attributable Income, G&A Expenses, Net Income (Annual and YTD 2023) - Company Filings, Author's Chart
Given the consistent ramp up in throughput towards nameplate and better grades vs. processing partially development ore in 2020/2021, MAG Silver generated earnings of ~$19.4 million ($0.19 per share), up from ~$7.6 million in the year-ago period. The increase was related to higher equity income from its investment in Juanicipio (higher production/sales) and higher interest income, as well as slightly lower G&A expenses in the period. This has pushed year-to-date earnings to ~$24.1 million and we should see further growth in annual EPS in FY2024, with a full year of production at nameplate capacity (~9.0 million attributable ounces of silver), setting the company up to generate US$0.90 in annual EPS next year if metals prices can cooperate ($24.00/oz silver or better).
Recent Developments
Moving over to recent developments, the recent equity financing has placed MAG Silver in a better cash position as it heads into Q3, with the capital raised offsetting the ~$25.0 million cash call (tax & mining duty obligations) earlier this year, giving MAG Silver a cash position of ~$52.4 million to finish Q2. Combined with what will be steady growth in its cash balance now that Juanicipio is in commercial production, this allows MAG Silver to aggressively drill out its other two projects in Utah (Deer Trail) and Ontario (Larder) if it chooses. Deer Trail is arguably the most exciting of the two given its proximity to the famous Bingham Canyon Mine (producing for ~120 years), where production initially began with shafts, with old-timers mining silver, gold and lead. MAG Silver's focus on the project is identifying carbonate replacement deposit [CRD] mineralization, and it continues to have success in this department, evidenced by its most recent update in early August.
Digging into the recent results at Deer Trail, those following MAG will recall that the company discovered the Carissa Zone, which was 1 kilometer southwest of the Deer Trail Mine [DTM] corridor, pointing to evidence of additional CRDs on the Utah property. While none of the drill results were world-class from a grade/thickness standpoint, these drill results combined with additional drilling at the DTM corridor have continued to yield thick intercepts from the most favorable host rock (Redwall Limestone), and we've seen instances of decent grades for polymetallic mineralization, with narrow intercepts including 53 grams per tonne of silver, 0.49 grams per tonne of gold, 1.98% copper (3.70 meters in hole DT22-09), in addition to 2.30 meters of 0.26 grams per tonne of gold, 108 grams per tonne of silver, 2.65% copper and ~0.90% lead/zinc in the same hole, which the company considered a success for its Phase 2 drilling program given that it points to what could be a larger mineralized system.
As for the most recent drill results, MAG noted that it intersected mineralization in three separates holes in new zones, with DT22-11 drilled 400 meters north of Carissa (zone of multiple stacked semi-massive sulfide mantos), DT22-12 drilled 800 meters northwest of Carissa (high-grade gold zones, with a best intercept of 1.5 meters at 6.1 grams per tonne of gold), and a hole drilled 1.7 kilometers southeast of Carissa also turning up solid gold and copper grades (2.2 grams per tonne of gold and 2.1% copper over 4.2 meters). MAG noted that DT22-11 at the Carissita Manto Discovery is the "thickest manto-style mineralization drilled to date and is separate from previously known zones", an encouraging development. Meanwhile, the gold zone intersected in DT22-12 may have hit a relative narrow intercept of high-grade gold, but also hit copper skarn over 10.5 meters. Finally, DT22-13 was drilled to target the intersection of the Cottonwood Creek and Tushar Faults and a coincident magnetic anomaly and delivered solid grades (~5.0+ grams per tonne gold-equivalent with rich copper), also an encouraging development.
While these holes came in at grades that are below that of Phase 1 drilling at Deer Trail, it's certainly positive to see mineralization wherever MAG drills at this project, and the company is now looking to test for porphyry targets that with three holes as part of its Phase 3 program. For now, it's too early to determine whether the company could have another mine on its hands here separate from Juanicipio, but given the upside if it were to hit a porphyry or delineate multiple CRD pods, I don't think it's unreasonable to assign $150 million in value to this asset given that the company is in elephant country for porphyries near Bingham Canyon and in a district known for its CRD mineralization. In summary, I remain cautiously optimistic about Deer Trail and while no world-class results were released on a gram-meter basis to date, MAG appears to have a good handle on this system given its step-out success and results could get better as it gains a better understanding of the overall mineralized system surrounding the DTM corridor.
Valuation
Based on ~105 million fully diluted shares and a share price of US$11.55, MAG Silver trades at a market cap of ~$1.21 billion and an enterprise value of ~$1.16 billion. This leaves the stock trading at a slight premium to its estimated net asset value of ~$1.14 billion, which assigns $200 million to exploration upside company-wide in addition to ~$980 million in value to Juanicipio ($25.00/oz long-term silver price). That said, a company with an interest in a world-class asset with significant silver exposure should arguably trade at a premium to net asset value, and I believe a 1.30x multiple is fair when adjusting for the current environment (compressed multiples sector-wide) and the fact that it is a single-asset producer. After applying this multiple, I see a fair value for MAG Silver of ~$1.49 billion or US$14.20, pointing to a 24% upside from current levels, making MAG Silver far more attractively valued than what I continue to see as overvalued names with razor-thin margins like First Majestic ( AG ) and Guanajuato Silver ( OTCQX:GSVRF ).
That said, I am looking for a minimum 35% discount to fair value to justify starting new positions in single-asset producers in Tier-2 ranked jurisdictions, and while Zacatecas is certainly one of the better states in Mexico, Mexico has declined in investment attractiveness over the past two years making it a less favorable jurisdiction for a single-asset producer. Some negative developments include the recent passing of mining law reforms, the ongoing strike in northeastern Zacatecas at Penasquito and regular illegal blockades over the past couple of years in other states (Oaxaca, Guerrero). If we apply this required discount to adjust for the elevated risk, the updated ideal buy zone for MAG Silver comes in at $9.25 or lower, suggesting that the stock is not yet in a low-risk buy zone despite the depth of its correction (~52% from its all-time highs).
Some of the mining law reforms in Mexico involve shortening of concession lives, granting of future water permits, mine reclamation, profit-sharing requirements to distribute at least 7% of profits to local indigenous communities and management of mine waste. As noted by MAG Silver in its filings, the Mexican Senate approved the legislation in late April and the amendments were approved by Mexico's Federal Executive Branch in early May.
Obviously, I could be wrong, and waiting for lower prices could be an opportunity cost. However, when it comes to high-risk businesses like miners with depleting assets, I prefer to buy at a deep discount to fair value or pass entirely. And with some names trading at less than 6x EV/FY2025 free cash flow estimates, I continue to see more attractive bets elsewhere in the sector with larger margins of safety than MAG Silver. So, although MAG Silver would make my top-5 list if I had to own a silver producer today (interest in a world-class asset plus the cash to fund exploration on two assets with solid exploration upside in the right location), the price isn't right yet and if I'm not getting an adequate margin of safety, I've found the best course of action being to pass entirely and or allocate capital elsewhere.
Summary
MAG Silver had a better Q2 with a significant increase in production at Juanicipio and earnings per share, as well as more encouraging results out of its Deer Trail Project in Utah. And with the stock down ~50% from its highs, the valuation has become much more reasonable than when I warned against paying up for the stock above US$20.00 in late 2021. That said, reasonably valued is not enough to justify owning a precious metals name and single-asset producers are riskier than peers, with all their cash flow coming from a single asset. This means that one should require a massive discount to fair value if they want to wait for what's truly a low-risk buying opportunity. To summarize, while I would become more interested in MAG if it dips below US$9.50, I continue to see more attractive bets elsewhere in the sector.
For further details see:
MAG Silver: A Better Q2 At Juanicipio