New Silver Producer Won’t Forget Exploration Roots

Source: Streetwise Reports   01/31/2022

With its new processing plant at the Juanicipio project in Mexico, MAG Silver is moving toward being a producer. But its president and CEO says it won’t forget its explorer DNA.

MAG Silver Corp. (MAG:TSX; MAG:NYSE American) was dealt a blow over the holidays when a Mexican electricity regulator’s decision delayed the commissioning of its 4,000 tonnes per day processing plant at its high-grade, large-scale Juanicipio property in Mexico by six months.

But the Canadian exploration and development company said it has barely missed a beat. The operator of the project on the Fresnillo Silver Trend, Fresnillo plc, is processing extra loads to take up the slack, and exploration continues there and at MAG’s Deer Trail property in Utah. There may even be new properties to explore on the horizon.

That adds up to significant opportunities for investors in 2022, MAG President and Chief Executive Officer George Paspalas said.

“We’re a smaller company, we’re not the operator,” Paspalas told Streetwise Reports. “Our overheads are quite modest. We can rapidly get to a position to start to return some of that cash to shareholders. … We’re going to be dividend payers, maybe significant dividend payers, with time.”

With the Juanicipio processing plant, MAG is moving from being an explorer to a producer. But Paspalas said it won’t forget its explorer DNA. Founded in 2003, MAG joined with Juanicipio operator Fresnillo Plc in 2005 to develop the property, which it calls a “robust, high-grade, high-margin underground silver project exhibiting low development risks.”

The JV is mining the Bonanza and Deep zones of the Valdecañas Vein in the Zacatecas state of Mexico. A 2017 preliminary economic assessment on the project estimated a 19-year mine life of 4,000 tonnes per day.

MAG owns 44% interest in the project, while Fresnillo owns the remaining 56%. The mine generated a total of 251,907 tonnes of mineralized material in 2021, resulting in 3.2 million ounces of silver and 6,577 ounces of gold, the company announced Jan. 26.

The district is characterized by veins that appear to be fed by an ore fluid upwelling zone. Valdecañas is one of two such zones known in the trend, Paspalas said.

“We’ve got one of the best houses on the best street in a very desirable location,” Paspalas said.

And it’s not the only neighborhood the company has moved into. In Utah, MAG released Phase 1 drilling results from three holes at its historic Deer Trail site in September 2021. All three holes cut high-grade sulphide mineralization, including 0.50 meters of 426 g/t silver and 6.5 g/t gold in hole DT21-02, and 1.90 meters of 952 g/t silver and 38.2 g/t gold in hole DT21-03. The company began Phase 2 of drilling there in August.

A $46 million equity financing at $17.15 per common share in November 2021 and a new $40 million revolving credit facility are acting as insurance and giving the company some cushion as it continues to explore and get the Juanicipio plant online. MAG will use the financing to fund exploration and for general corporate purposes.

Construction of the Juanicipio plant started in 2019. MAG expected it to come online by the end of 2021, but the company was surprised on Dec. 23 when the state-owned electrical utility Comisión Federal de Electricidad said it would not immediately approve the plant’s connection to the electrical grid because of the need to install further equipment on the system. The regulator still needs to supervise the physical connection to the grid and approve blackout prevention devices, MAG said.

“I can tell you, it ruined Christmas lunch,” Paspalas said.

The regulator told them the grid may not be online until May. But it also said in a letter issued Dec. 31, 2021, that there was a possibility the control panel needed for the installation could be available by the end of January.

Paspalas said he does not know when the plant will come online, but it is ready once the electricity is turned on. He said company officials will be meeting with regulators in the coming weeks.

“I can’t give you a clear answer at the moment,” he said about a timeline. But “we just need the electrons to turn.”

Any financial impact from the delay has been softened by Fresnillo taking on loads from  Juanicipio in its own Fresnillo and Saucito mills nearby for processing. Analyst Joe Reagor with ROTH Capital Partners said in a research report that it’s projected the overflow operation could cover to 50% of the production previously estimated for the first half of 2022.

“We believe that MAG is one of the better options for investors looking for exposure to silver. Given the high quality of the asset, a strong partner (Fresnillo), its near-term startup which could lead to a market re-rating, MAG’s financial position, and excellent exploration potential, we rate the shares Outperform.”

—Raymond James analysts Brian MacArthur and Henry Lin

Paspalas did not have exact figures but said that amount could reach closer to 100%.

“The financial impact of waiting for the electrical connection is offset by the fact that we’re going to make similar sort of money,” he said.

Many analysts agreed. Reagor shaved his target price for MAG from $27 to $26 after the plant’s announced delay but maintained ROTH’s Buy rating for the stock. Raymond James still rates the company Outperform with a target of CA$28. Target prices among 12 analysts range from CA$23.50 to CA$32.54.

“We believe that MAG is one of the better options for investors looking for exposure to silver,” Raymond James analysts Brian MacArthur and Henry Lin wrote. “Given the high quality of the asset, a strong partner (Fresnillo), its near-term startup which could lead to a market re-rating, MAG’s financial position, and excellent exploration potential, we rate the shares Outperform.”

Silver struggled in 2021. On Dec. 23, it was trading down 13.5% year-to-date, according to Kitco. On Jan. 31, it stood at $22.45 per ounce. Analysts’ price forecasts for 2022 vary from $24 an ounce to above $30 an ounce.

Paspalas believes it will rebound this year, mainly because of silver’s use in a wide range of industrial applications, such as solar panels, electronics, electric vehicles, medical devices, water purifiers, and wood preservatives. Also, as people become more health-conscious due to the pandemic, silver’s biocidal properties will make it more attractive for use in medical procedures and housewares.

Paspalas said, “2022 and beyond are going to be good years for silver.”

He said MAG will be well-positioned to deliver on the demand. When the Juancipio plant comes online, it will generate a lot of cash for the company, and possibly, shareholders. But MAG will also continue its mission to explore. The company has explored just 5 percent of the Juanicipio property.

MAG also could be on the lookout for new opportunities to find new resources, Paspalas said.

“Maybe we’ll announce that we’re going to have another property that we’re going to explore that puts three nice legs on the chair for us,” Paspalas said. “That’s what we’re good at. Our DNA is exploration. … Let’s see if we can get more of those in the portfolio. We’re constantly looking for that.”

Disclosures:

1) Steve Sobek compiled this article for Streetwise Reports LLC. He or members of his household own securities of the following companies mentioned in the article: None. He or members of his household are paid by the following companies mentioned in this article: None.
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