Amid the global coronavirus pandemic and extreme market volatility, it’s understandable that an exploration phase junior miner with no current production may not be at the top of your buy list. Still, we think MAG Silver Corp (MAG) with a current market cap of $660 million deserves your attention with several upcoming catalysts and significant upside potential. Most importantly, the company is set to start initial production at its Juanicipio mine joint venture in June. We like the stock which benefits from its interest in a world-class mining asset supported by a solid balance sheet. We are bullish on precious metals and think MAG can outperform to the upside.
MAG just reported its fiscal 2019 financial results on March 30th, 2020. Keep in mind the company does not currently have any mineral production or generate operating cash flows. The key point here is that there was a narrowing loss of $4.43 million compared to a $5.8 million loss in 2018 as the Juanicipio mine construction moves forward. MAG Silver holds a 44% interest in the Juanicipio mine which is located in the “Fresnillo Silver Trend” in Mexico.
The company ended the year with $71.9 million in working capital and no long-term debt. That being said, the company may need to raise additional capital to meet its full share of the project’s capital requirements, but thus far expenses have been under previous estimates.
The 56% majority owner of the mine, Fresnillo Plc (OTCPK:FNLPF) is finalizing engineering and overseeing construction of a 4,000 ton per day mill at the site while underground development is continuing. Fresnillo is recognized as one of the world’s largest primary producers of silver and this JV project with MAG is adjacent to one of its most prolific mining assets.
The major progress over the past year has been the construction of internal spiral footwall ramps alongside the mine vein system. There is also activity in the construction of related underground crushing chambers, conveyor network, and ventilation infrastructure. Underground development has reached 26km with access to the upper portion of the resource. In terms of the mill fabrication, the company says all major components have arrived at the site.
(Source: Company IR)
The plan here is to begin ore processing in June at the Fresnillo mill (100% owned by Fresnillo) until MAG’s Juanicipio processing plant is completed in mid-2021. The start-up of the underground mine this year represents several positive developments for MAG:
- The initial production will generate some operating cash flow for the company that can offset continued project capital requirements.
- The early mining activity allows for a faster ramp-up period in the Juanicipio processing plant that is now expected to reach 85% capacity by Q4 2021.
- An improved knowledge base with the local geological and mineralization dynamics of the mine.
The Juanicipio resource reserve is located in a high-grade mining district and expected to have a 19-year mine life. The two mining zones named “Bonanza” and “Deep” are primarily silver deposits, but will also produce significant amounts of zinc, lead, and gold.
Juanicipio mine is estimated to hold a total of 266 million ounces of silver and 1.379 million ounces of gold between indicated and inferred resources including both the Bonanza Zone and Deep Zone. A 2017 study estimated the all-in sustaining cost of silver at the mine at $5.02 per ounce, highlighting the high-margin potential. It’s also worth noting that MAG maintains other exploratory assets in the area.
(Source: Company IR)
Analysis and Forward-Looking Commentary
The ongoing COVID-19 pandemic and the related global economic disruption continue to be the main theme in financial markets. Precious metals have been exceptionally volatile this year with silver briefly reaching a high near $19.00 per ounce in late February before crashing to under $12.00 at the lows in March. The observation is that silver and gold have been caught up in a contagion trade with investors forced to sell financial assets to cover losses and raise cash.
Silver has underperformed gold this year in percentage terms and we relate this dynamic to silver’s greater use as an industrial metal. The worldwide slowdown represents demand headwinds for the various uses of silver in areas like electronics and jewelry. There is also a dynamic of a surging U.S. dollar that pressures commodity prices in there near-term.
Still, we think the outlook for silver and gold as an investment asset is strongly bullish in the current environment. Global central banks and policymakers are taking aggressive stimulus efforts in hopes of supporting growth which we believe risks long-term inflationary pressures. The sharply lower move in interest rates also supports precious metals as a store of value.
We see MAG Silver as well-positioned to benefit from an upside in the price of silver and gold along with improving sentiment towards miners in the market. The near-term catalysts including early stages of production this year and operating cash flows are bullish factors that can support sentiment towards the stock. The risks here are that silver prices move lower and a break under $13.00 per ounce would force a reassessment of our bullish thesis.
(Source: Company IR)
We view MAG Silver as a best-in-class exploration phase silver junior miner. The nature of this type of company is naturally speculative as it requires a long-term outlook with several operating and financial uncertainties. Still, we think the combination of its world-class mining interest in Juanicipio and the JV venture with Fresnillo as the premier silver miner in the world offers a level of credibility and confidence in the project timetable. We can look forward to several upcoming catalysts and 2021 which will represent the transition of MAG towards full-scale precious metals producer. We are bullish on silver and see MAG as outperforming the commodity price to the upside.
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Disclosure: I am/we are long MAG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.