2023-10-26 01:32:38 ET
Summary
- MAG Silver announced that Juanicipio has finally reached nameplate capacity of 4,000 tonnes per day, de-risking the story with Juanicipio no longer reliant on Fresnillo's other plants for processing.
- This is a very positive development with a significant increase in equity income expected in 2024, given that MAG should see attributable production of 8.5+ million ounces of silver.
- In this update, we'll dig into the recent results, MAG stock's valuation, and where the updated low-risk buy zone sits for the stock.
Just over ten months ago, I wrote on MAG Silver ( MAG ), noting that while it had an exciting year ahead, the better course of action was waiting for a steep pullback vs. chasing the rally above US$16.70. This is because silver was hugging resistance at $24.00/oz and the stock was trading near ~1.50x P/NAV, a valuation that left little upside for new investors. Since then, the stock has slid ~35%, underperforming the Silver Miners Index ( SIL ) and undercutting its 2022 lows of US$10.30. However, while the pullback in many silver miners has been justified because of continuous share dilution, like Guanajuato Silver ( GSVRF ) and Coeur Mining ( CDE ), MAG Silver has been one of the few names to maintain a low share count and the story has improved materially, with Juanicipio finally ramping up to nameplate capacity last quarter. Let's take a closer look below:
All figures are in United States Dollars unless otherwise noted and all production figures are on a 100% basis unless otherwise noted.
Juanicipio Operations - Company Presentation
Q3 Production Results
MAG Silver reported its production results from Juanicipio (44% ownership) this week with Fresnillo ( FNLPF ) as the operator, noting that nameplate capacity of 4,000 tonnes per day was reached in Q3, a development that shareholders have been anxiously waiting for after the slower than planned tie-in to the national power grid. This is positive news as it has de-risked operations given that MAG Silver no longer has to rely on excess capacity being available at Fresnillo's Fresnillo and Saucito plants in the district. However, it did impact Q3 production with no material heading to these mills in August and September, resulting in tonnes processed declining by over 14% to ~322,200 tonnes. So, while grades were higher sequentially at 523 grams per tonne of silver (Q2 2023: 498 grams per tonne of silver), production slid to ~4.78 million ounces of silver and 9,400 ounces of gold, translating to a ~2% decline in silver and gold production.
Juanicipio Milling vs. Toll-Milling - Company Presentation Juanicipio Operating Results - Company Filings, Author's Chart
Looking at the production on an attributable basis above, MAG's share of production (44%) came in at ~2.1 million ounces of silver and ~4,100 ounces of gold before adjustments, translating to over $50 million in attributable revenue despite the lower metals prices in the period. However, we should see an even better year in 2024 with the benefit of lower transportation costs at Juanicipio (no need to toll-mill material), and annual attributable production to MAG Silver of 8.5+ million ounces of silver, translating to equity income of at least $75 million in 2024 (FY2022: ~$40.8 million). These proceeds will top up MAG Silver's already strong cash position ($54 million, with no debt) which can be directed towards drilling at Juanicipio, Deer Trail, and Larder Lake.
Exploration Upside & Technical Picture
Speaking of exploration, investors continue to await results from its new Larder Lake Project, and Deer Trail has continued to see exploration success, which I detailed briefly in my previous update . However, the most significant opportunity is in the Fresnillo District at Juanicipio, even if things have been quiet with the last major updated being in Q2 2022. This is because just 5% of the entire property has been explored to date and directly beneath the Bonanza Zone that's currently being mined (~10.2 million tonnes of resources at 550+ grams per tonne of silver) are multiple additional zones, with the Deep Zone having significantly more tonnes and higher base metal and gold grades, offset by lower silver grades, as well as high-grade veins like Venadas (discovered in 2019) that run opposite to the typical northwest orientations, with highlight intercepts of 2.1 meters true width at 489 grams per tonne of silver and 0.94 grams per tonne of gold, 1.4 meters at 491 grams per tonne of silver and 2.69 grams per tonne of gold, and 2.5 meters at 918 grams per tonne of silver and 1.8 grams per tonne of gold.
Venadas I & II and Valentina Veins - Company Website
Since the 2019 drill program that uncovered Venadas I and II and the Pre-Anticipada Vein, MAG Silver has continued to complete infill drilling at the much larger Deep Zone, with highlight intercepts in 2020 including several thick intercepts that included:
- 21 meters true width at 357 grams per tonne of silver, 1.6% lead, 3.1% zinc, 0.20% copper
- 18 meters true width at 198 grams per tonne of silver, 3.9 grams per tonne of gold, 4.2% lead, 10.0% zinc and 0.40% copper
And as of the 2022 update, MAG noted that most of its intercepts are comparable to neighboring holes, which confirm its expectations of grade and thickness and is now confident that Valdecanas sits on top of an upwelling zone that is contributing to this considerable mineral endowment. In addition, the company believes that it may have multiple upwelling zones on its property, and the previous discovery of dilatant zones is certainly an exciting development. This is significant because the market may be underestimating the economic potential of Juanicipio, which is an asset that could ultimately remain in production past 2050 if we can continue to see exploration success. Plus, with MAG Silver being the minority partner of this world-class asset, which allows it to maintain a lean organizational structure, it should command a premium vs. other single-asset silver producers.
Valdecanas Vein System - Company Website
So, is the stock a buy?
MAG Weekly Chart - StockCharts.com
While MAG Silver has become more reasonably valued after its ~55% correction, the stock never belonged above $23.00 in the first place, which makes the magnitude of the correction less relevant. And with Mexico's investment attractiveness losing points after the major strike at a neighboring mine (Penasquito) in Zacatecas and recent mining law reforms, it's less desirable than it was when MAG Silver made its all-time highs in June 2021 to be a single-asset miner in Mexico. So, I think a more conservative multiple for the stock today is 1.30x P/NAV, translating to a fair value of ~$1.50 billion or US$14.30 based on ~105 million fully diluted shares. And given that I am looking for a minimum 35% discount to fair value, I continue to see the ideal buy zone for the stock coming in at US$9.30 or lower. As shown above, this lines up with a strong support zone for the stock near the US$9.00 level.
Although MAG Silver has two other Tier-1 jurisdiction projects in Utah and Ontario which diversify the company, neither will go into production this decade based on their current level of advancement, suggesting that MAG Silver will remain a single-asset producer until at least 2030.
Summary
MAG Silver should see a year full of catalysts as it continues to drill three properties and will benefit from the highest years of production at Juanicipio now that it's an independently producing asset, with MAG likely to be at least a ~8.5 million ounce silver producer in 2024 (attributable basis). This will push the company ahead of peers like Endeavour Silver ( EXK ), SilverCrest Metals ( SILV ), with peak production of 20+ million ounces of silver (~8.8 million ounces attributable to MAG or ~11 million attributable silver-equivalent ounces [SEOs]. And with any worries finally in the rear-view mirror with Juanicipio operating independently, the stock should be able to re-rate once positive sentiment returns to the sector. That said, I prefer to buy hated stocks with a massive discount to fair value, and while MAG is out of favor and cheap, I see only a moderate margin of safety here. For this reason, I continue to focus elsewhere and would only get interested below US$9.30 with more attractive opportunities elsewhere.
For further details see:
MAG Silver: Juanicipio Reaches Nameplate Capacity