Partnership with Fresnillo Has Lucrative PotentialWed, 10/21/2015 - 08:33
Many companies in the silver mining business boast that they have the best project available in the market. While there are many good projects out there, not many have the characteristics that MAG Silver’s (MAG) project has in Zacatecas. The company’s most advanced asset, Juanicipio, might be one of the best developing silver asset on the planet. Whilst it may not be one of the highest-grade silver development projects available, Juanicipio has built its reputation on the back of very low mining costs, 90% recovery of metals, and other factors that guarantee value creation. At US$10 per silver ounce, it also has a 15% after-tax internal rate of return. What makes Juanicipio particularly unique, though, is that it is being built in Fresnillo plc’s own backyard. The Mexican giant is also the project operator as it holds 56% of the joint venture that owns Juanicipio. “This makes Juanicipio more than just a high value asset,” says George Paspalas, President and CEO of MAG Silver. “It provides investors with a very low risk development scenario due to Fresnillo’s proven expertise in developing and operating similar mines in the Fresnillo district of Zacatecas.” In addition, MAG’s investor appeal is rising after it made a discovery in 2012 at its Cinco de Mayo asset in Chihuahua, which has substantial resources, very high grade ore and high value potential. “If investors buy now, they are getting a cheap option on a company that will generate more value with Cinco de Mayo. In fact, the model of the Upper Manto Zone at Cinco de Mayo looks very similar to the model of the Juanicipio vein. It has about the same depth and width and sits at about the same angle,” explains Paspalas.
On the back of these two successes, MAG’s mission is to become one of the premier companies in the silver mining industry. Its target has always been to seek high-grade silver in projects that present at least ten years of mine life and will generate high internal rates of return. MAG maintains a disciplined approach to high-grade deposits though, assures Paspalas. While there are other plenty of high-grade silver deposits around, it can happen that the metal cannot be recovered with current technology. Some projects might be high grade but without a sufficient rate of return or would require expensive mining costs. MAG establishes such matters very early on by evaluating all these parameters at the early exploration stage. One of the company’s beliefs is that not all ounces are equal, meaning that any potential project must meet the specific criteria outlined above. Following this model, MAG has made five discoveries since 2003, with each being a high grade deposit. Due to this success, the company has been able to raise over US$235 million from the equity markets, with a mere 68 million shares outstanding. Paspalas summarizes its appeal by saying that “the interesting thing about MAG is that its story is not very complex. Our star asset is being built by the best people in the global silver market and our other property is 100% owned with great potential.” This optimistic outlook comes while only holding properties in Mexico, meaning the company has a real belief in the country’s potential. Paspalas has one strong argument that encapsulates the reasons for MAG’s presence here: Mexico is the home of silver. “25% of all silver mining in human history comes from Mexico and 10% of every ounce of silver in the world has come from the Fresnillo district,” he says. “For all who want to be in the silver business, Mexico is the place to be. There are over 14 billion silver ounces in deposits around the world, and 8 billion exist in Mexico.”
At Juanicipio, Fresnillo and MAG are currently advancing the underground decline toward the high grade Valdecañas and Juanicipio silver vein discoveries. For Paspalas, Fresnillo brings another great advantage as it has run three similar mines plus two processing plants near Juanicipio in the last ten to 12 years. “There is very little guesswork left in the way Fresnillo builds its mines. Its expertise in doing these types of projects is proven.” Furthermore, Fresnillo’s Saucito II will be operating on the same vein just over the property boundary two years before the JV starts to develop it. This means that the JV will have two years of experience in mining the ore before it even reaches the facility. MAG has learned a lot from Fresnillo in developing Juanicipio, including how to acquire access to surface land through a purchase. However, it should not be believed that contributions to the project have been a one-way street. MAG’s primary contribution came in the exploration efforts that led to the discovery of silver on both sides of the property boundaries. The JV is also beginning to look past the development stage at Juanicipio. Construction will begin on the processing facility with the first cash flow expected to come from the project in 2018. This cash flow timeline is backed up by the fact that the main grade reported in the new resource estimate for Juanicipio has remained largely unchanged. In fact, a number of extra tonnes of low grade ore have been revealed in the bottom of the vein. Paspalas is keen to point out that 850 million ounces of silver have been found in the Fresnillo district since Fresnillo became a public company and that MAG played a part in that exploration success. “We are certainly learning a lot about developing and operating a mine in Mexico. We will be able to transport this expertise to the development of the Cinco de Mayo project,” he states. This is a valuable learning curve for MAG as many exploration companies have tripped up at this stage.
To MAG’s mind, Juanicipio does not stand alone as the company is busy laying out specific exploration targets for Cinco de Mayo with evidence proving that the project is economically viable. All of the geological information currently available backs up MAG’s assertion that Cinco de Mayo may hold a large carbonate replacement deposit. According to the company’s numbers, the inferred resources of the Upper Manto Zone equal 12.5 million tonnes with good grade. These are also open in several directions, setting up a possible expansion in the future. Current plans show that the operation will be an underground mine starting at about 125m below the surface. Below this lies the Pegaso discovery at a depth of 800-900m. “We cannot confirm a deposit there yet but we have some very promising indicators. We still have to invest money on drilling to have a proper resource estimate. We will start drafting the economics of the Upper Manto though, to see what kind of mine could be built in this zone,” explains Paspalas. Another challenge that MAG is facing at Cinco de Mayo is the precise delineation of the district, for which it has to negotiate with local ejidos. For this, Paspalas retains his usual confidence, saying that the company has a good, long-term relationship with most of the ejido members. Several previous negotiations were concluded favorably, including that which gave MAG the surface access to carry out the drilling. “We try to uphold a respectful relationship and understand what they want to move forward. It is true that these negotiations take some time in Mexico. The challenges are due to a combination of social, political, economic, and bureaucratic factors which take a while to discuss and understand,” he says. “We do not want to rush or force people into anything. We want to know that even after the mine is closed, people will look back and think positively about MAG Silver’s involvement. We want to leave an impact that is positive for the future.”
To fund the development at Juanicipio, MAG issued 7,712,000 common shares in mid-2014, bringing in CA$86 million (US$71.8 million). This capital will be used to fund MAG’s 44% share of the Juanicipio development over the next two years. For Paspalas, this was the best financing option for the company under current market conditions. The shares issued to raise this capital were done at a 52-week-high in MAG’s share price, minimizing shareholder dilution. The initial offering of C$79 million was oversubscribed, which meant that the offering could fill up a 15% overallotment. This successful financing is proof of the market’s belief in MAG having an outstanding asset. “Our share price performance since that also shows that the market has recognized that it was a good financing deal. In the early weeks of 2015 we have traded above the share price that the equity was issued at,” proudly proclaims Paspalas. With this capital now available, MAG’s future seems clear. The development of Juanicipio is vital as, if the target is met, 2018 will mark the first time ever that MAG starts to receive a large cash flow. Paspalas describes the building of Juanicipio like building an ATM which will sit at the center of the company pouring out cash. With this solid foundation, Cinco de Mayo will then be developed with MAG continuing to eye up exploration assets with reasonable acquisition costs.