Tier 1 Silver Asset Will Be 'Cash Cow' for Co., Expert Says

As if on cue, silver prices began breaking out the week after MAG Silver Corp. (MAG:TSX; MAG:NYSE American) released an updated technical report for its new Juanicipio project in Mexico confirming its status as a Tier 1 silver asset.

Ron Struthers of Struthers Resource Stock Report typically follows gold but predicted the move in the market and recommended MAG shares to take advantage of the sector increases, saying Juanicipio "will be a real cash cow" for the company.

"A mine does not get much better than this one, and I don't think the stock is reflecting this fact," Struthers wrote on April 3 as the precious metal's price was rising from US$24.52 per ounce on March 28 to US$27.33 on Friday afternoon.

The company's stock was US$9.01 per share on March 26 and rose to US$12.12 on April 5 on the strength of the March 27 report and increasing optimism in silver.

MAG's updated technical report for the project outlines an initial mineral resource estimate and an after-tax NPV of US$1.2 billion over an initial 13-year life of mine (LOM).

The report solidifies MAG's "position as one of the lowest-cost silver producers in our coverage," Scotiabank analysts Ovais Habib and Eric Winwill noted as they upped their recommendation of the stock.

"We believe the release of the updated Juanicipio technical report represents a major de-risking milestone for MAG’s shares," Scotiabank analysts Ovais Habib and Eric Winwill wrote, setting a US$13.50 per share target price.

"In our opinion, the combination of a high-grade orebody, low-cost production setting up for higher margin and solid FCF (free cash flow) generation plus exploration upside at compelling valuation positions MAG as a re-rate candidate and as such, we are upgrading our recommendation to Sector Outperform," the analysts wrote on March 28, just one day after their "first look" note on the report kept a Sector Perform rating.

"We believe the release of the updated Juanicipio technical report represents a major de-risking milestone for MAG’s shares," the analysts wrote, setting a US$13.50 per share target price.

Struthers predicted silver prices would go higher and lead to even better cash flow at the project.

"If we get the prices I expect, hang on tight," Struthers wrote. "There is tons of upside exploration potential here (at Juanicipio), so (it) will be a very long mine life, and (there is) the potential the mill rate could be expanded in a few years to increase production."

"As they say, timing is everything, and I believe the time is soon arriving" for silver, he noted.

The Catalysts: Resource Grows One-Third, Project Only 5% Explored

The updated National Instrument 43-101 compliant report for Juanicipio found mineral resources grew 33% from the original PEA to 17 million tonnes (Mt) at grades of 310 grams per tonne silver (g/t Ag), 1.86 g/t gold (Au), 2.89% lead (Pb), and 5.32% zinc (Zn), the company said.

Inferred mineral resources increased by 16% to 14.1 Mt at grades of 236 g/t Ag, 1.06 g/t Au, 2.41% Pb, and 6.12% Zn at Juanicipio, which is a joint venture (JV) between MAG (44%) and operator Fresnillo Plc. (56%).

The company said the inaugural mineral reserve estimate in the report significantly increases economic confidence in the project, as well, with 15.4 Mt of Proven and Probable Mineral Reserves at grades of 248 g/t Ag, 1.58 g/t Au, 2.64% Pb, and 4.8% Zn (628 g/t silver equivalent, or Ag Eq).

TD Cowen analyst Craig Hutchison maintained his Buy rating on the stock with a CA$18 per share target price.

MAG said the independent report was prepared by AMC Mining Consultants (Canada) Ltd. of Vancouver, with assistance from Knight Piesold and Co.

But the company said there is a lot more to the project, noting it plans to unlock the extended value of the rest of the 7,600-hectare site as margins continue to ramp up for the plant.

"In the short term, we anticipate resource conversion to prolong high-grade silver production and mine life," MAG President and Chief Executive Officer Paspalas said. "Looking ahead, this district scale project remains 95% unexplored with multiple potentially high-impact targets identified."                 

Analyst Brian MacArthur of Raymond James Ltd. wrote in a note on March 28 that the firm had updated it forecasts to reflect the study.

"We also expect over time the mine life could be extended given the significant inferred resources and history of converting resources to reserves and good exploration potential," wrote the analyst, who rated the stock Outperform 2 with a target price of CA$19.50 per share.

Other Analysts' Ratings

Maintaining a Buy rating with a US$14.10 per share target price, analyst Joe Reagor of Roth MKM wrote on March 27 that the firm also sees greenfield potential at the Juanicipio project.

"We continue to believe MAG is undervalued by the market," Reagor wrote. "Additionally, we continue to believe the market significantly undervalues the potential for new discoveries on the project."

Because of the technical report, analyst Nicolas Dion from Cormark Securities increased its NAVPS (net asset value per share) model for the company.

"MAG is trading at the low end of its past range and below most of its peers, despite owning the highest-quality silver mine in the space in our view," the analyst wrote on March 28, rating the stock a Buy with a CA$18 per share target. "We see having Fresnillo as the operator as a key advantage, though we note uncertainty on the cadence of future dividends from the JV."

TD Cowen analyst Craig Hutchison maintained his Buy rating on the stock with a CA$18 per share target price.

"The maiden reserve estimate significantly de-risks the mine plan, in our view, and the report outlined lower-than-expected operating and sustaining costs," Hutchison wrote in his March 28 note.

'Significant' Silver Production Potential

Earlier this year, MAG released its Q4 2023 and full-year 2023 financial results, coming in ahead of several analysts' predictions for adjusted earnings-per-share (EPS) with US$0.15.

Scotiabank analysts Habib and Winmill attributed the results to lower operating costs. Juanicipio delivered robust cost performance with a cash cost of US$3.76 per silver ounce sold (43% below Scotiabank's estimate) and an all-in sustaining cost (AISC) of US$9.17 per ounce of silver sold in the fourth quarter, the company said. Scotiabank had estimated AISC for the quarter at US$11.60 per ounce Ag, or 21% less than MAG reported.

"The company ended the year with US$68.7 million in cash (vs. US$58.5 million in Q3)," noted the analysts, who gave the stock a target price of US$15.

A total of 346,766 tonnes of material at a head grade of 467 grams per tonne (g/t) were processed at Juanicipio in the fourth quarter. MAG said milling performance for 2023 totaled 1.27 million tonnes at a head grade of 472 g/t.

MAG also recently announced preliminary 2024 guidance for the mine. Fresnillo reported the silver head grade at the project is expected to range between 380 g/t and 420 g/t for the year, "translating to significant silver production potential."

Ownership and Share Structure

Institutions own 70% of MAG, and 30% is retail, according to the company.

Top institutional shareholders include Juanicipio project operator Fresnillo Plc. with 9%, BlackRock Investment Management (UK) Ltd. with 10.8%, Van Eck Associates Corp. with 9%, First Eagle Investment Management LLC with 6.2%, and Sprott Asset Management LP with 3%, the company said.

MAG Silver has a market cap of US$1.25 billion. It has 102.97 million shares outstanding, according to Reuters. It trades in a 52-week range of US$14.42 and US$8.20.

Important Disclosures:

1. MAG Silver Corp. is a billboard sponsor of Streetwise Reports and pays SWR a monthly sponsorship fee between US$4,000 and US$5,000.
2. Steve Sobek wrote this article for Streetwise Reports LLC and provides services to Streetwise Reports as an employee.
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