MAG Silver: Peer-Leading Margins, But Wait For Better Price Levels

Olivier Le Moal

The Q3 Earnings Season for the precious metals sector is finally over, and one of the more recent companies to report its results was MAG Silver (NYSE:MAG). Unlike most other Mexican silver producers, MAG reported 60% plus all-in sustaining cost margins [AISC] and positive earnings despite the impact of a rising Mexican Peso, lending itself to the above-average silver-equivalent grades at its shared Juanicipio Mine (MAG 44%). Meanwhile, the company has a busy 2024 ahead as exploration ramps up at Larder Project, and drilling has already begun on three porphyry targets at its Deer Trail Project in Utah. In this update we’ll dig into the Q3 results, MAG’s valuation vs. peers, and where the stock’s updated low-risk buy zone lies.

Juanicipio Mine – Company Website

All figures are in United States dollars unless otherwise noted and production results are on a 100% basis unless otherwise noted.

Q3 Production & Sales

MAG Silver released its Q3 results last month, with the Juanicipio Mine reporting quarterly production of ~4.78 million ounces of silver (~4.29 million payable ounces) on a 100% basis. On an attributable and payable basis, this translated to ~1.89 million ounces of silver, ~3,400 payable ounces of gold, ~3.38 million payable pounds of lead, and ~4.22 million pounds of payable zinc. And if we compare these figures to Q3 2022, this was a nearly 80% increase in attributable silver production and a ~60% increase in attributable gold production, with the mine generating an impressive ~$125 million in revenue and ~$40.6 million in free cash flow on a 100% basis. Meanwhile, throughput was also up significantly to ~322,200 tonnes (Juanicipio and Saucito plants), but with 92% of feed through Juanicipio’s plant and no milling through Fresnillo’s (OTCPK:FNLPF) other plants in August/September.

Juanicipio Quarterly Operating Metrics (Payable Attributable Production to MAG) – Company Filings, Author’s Chart

The declaration of commercial production with a nameplate capacity of 4,000 tonnes per day met (plus silver recoveries consistently above 88%) is certainly an exciting milestone, and we should production of just shy of 8.0 million ounces of silver attributable to MAG Silver next year, translating to ~$75 million in annual free cash flow. This is certainly a positive development as MAG Silver will no longer need to worry about share dilution to improve its balance sheet (it did a small $40 million raise in Q1 2023), with MAG set to finish 2024 with well over $100 million in cash to fund exploration at its two highly prospective properties (Larder Lake and Deer Trail). In addition, the ramp up to commercial production has de-risked the thesis, with grades reconciling well to date (Q3 2023 head grade of 523 grams per tonne of silver), and without having to rely on Fresnillo’s other plants to process Juanicipio ore as the company had to last year.

Costs & Margins

Moving over to costs and margins, Juanicipio’s all-in sustaining costs came at an industry-leading figure of $9.19/oz, translating to ~61% AISC margins vs. an average realized silver price of $23.51/oz, or ~$61.4 million in AISC margin. This solid quarter allowed MAG to generate $13.7 million in equity income (~$44 million year-to-date) and ~$8.9 million in net income (~$33 million year-to-date), with higher interest income offset by higher G&A and business development costs in the period. As the chart below shows, net income and margins benefited from higher average realized silver and gold prices ($23.51/oz and $1,912/oz) with MAG exiting the quarter with ~$58.5 million in cash, and we should see even better margins in Q4 given the recent trend higher in metals prices.

MAG Silver – Quarterly Equity Income, Silver/Gold Price & Cash Balance – Company Filings, Author’s Chart

Recent Developments

As for recent developments, outside of the discovery of new high-grade mineralization at Deer Trail which continues to confirm the Hub & Spoke thesis with a potential porphyry center on the property (discussed in a previous update), it was a relatively quiet quarter. This is because the company is still drilling at a relatively small scale at its Larder Project in Ontario and is in the process of completing property-wide data reevaluation (including reviewing historic drilling, re-assaying available pulps with 4-acid digestion, additional geophysics and field mapping/sampling). These results will help to better inform future exploration, with MAG noting that it drilled ~4,500 meters in Q3, with a minimum of 17,000 meters of drilling planned (with plans to test targets on the Cheminis and Bear areas by year-end). As shown below, year-to-date expenditures (ex-acquisition costs) sit at ~$4.7 million on geochemical, camp/site, drilling, consulting, and geophysical expenditures, up from ~$2.2 million in full-year 2022.

Larder Project Expenditures – Company Filings

MAG Silver Catalysts & Company-Wide Plans – Company Website

Overall, the steady progress on its two exploration assets remains encouraging, and we should get a better idea of the potential at Larder with a multi-rig drill program expected next year. That said, the current pace of development and stage of these projects suggests that MAG will be lucky to reach the Pre-Feasibility Study phase by Q3 2027 on either asset (assuming this level of expenditures is warranted by the results), suggesting production in 2030 at the earliest. Hence, while both opportunities provide MAG Silver, the opportunity to re-rate over the longer term as it may add its own operating asset eventually, investors will have to wait several years at this rate to see diversification out of Mexico.

Dual-asset producers typically trade at a premium to single-asset producers, because of diversification, as any issues for single-asset producers can create cash-flow issues because of reliance on one asset only.

Valuation

Based on ~105 million shares and a share price of US$11.00, MAG Silver trades at a market cap of ~$1.16 billion and an enterprise value of ~$1.0 billion. This makes it one of the higher capitalization names in the silver space, ahead of names like Endeavour Silver (EXK) and Gatos Silver (GATO) with similar production levels, but with MAG Silver being unique in that it’s in arguably the best state in Mexico (Zacatecas), it has two Tier-1 jurisdiction exploration projects, and it enjoys industry-leading margins. Meanwhile, the stock trades roughly in line with its estimated net asset value from a P/NAV standpoint, sitting at ~1.01x vs. an estimated net asset value of ~$1.15 billion ($280 million assigned to exploration upside at Juanicipio, Deer Trail, and Larder).

Juanicipio Exploration Upside & Fresnillo Silver Trend Historical Production – Company Website

Obviously, exploration success will be needed to justify this fair value estimate, but the company certainly has the right address (south of Bingham Canyon and Tintic in Utah, east of the highly productive Kirkland Lake Camp in Ontario and with only a fraction of its property explored at Juanicipio).

This premium is clear in the below chart, with MAG Silver trading at one of the highest EV/EBITDA multiples among its peer group of small to mid-tier silver producers.

Silver Producers, MAG Silver & Argonaut Gold Valuations – Koyfin.com

Using what I believe to be a fair multiple of 1.3x given that the company has a diversified portfolio with industry-leading silver exposure (Juanicipio is primarily a silver mine) and above-average grades, I see a fair value for MAG of US$14.25. This translates to a 29% upside from current levels, making MAG far more attractively valued than low-margin/low reserve life peers like First Majestic Silver (AG). Still, relative value alone is not enough to justify an investment, and especially when compared to overvalued names that have commanded a premium with little justification. In addition, I am looking for a minimum 35% discount to fair value to justify starting new positions in single-asset producers in Tier-2 ranked jurisdictions (implying a low-risk buy zone of US$9.30 or lower). So, while MAG I see upside in MAG Silver, I continue to see far more attractive bets elsewhere in the sector.

As for more attractive bets, while MAG trades at ~13.0x FY2024 EV/FCF as a single-asset producer in a Tier-2 ranked jurisdiction and ~1.0X P/NAV, Argonaut Gold (OTCPK:ARNGF) is sitting at just ~0.40x P/NAV and ~3.5x FY2024 EV/FCF as a Tier-1 jurisdiction gold producer and with zero value assigned to its three producing Mexican mines (expected to be sold but are generating free cash flow). Plus, Argonaut’s P/NAV multiple drops below 0.30x if we consider an expansion case for Magino (being studied) and assume a 17,500 tonne per day throughput rate starting in H2-2026. Hence, with other producers operating in attractive jurisdictions (Ontario, Nevada) that are trading at a fraction of MAG Silver’s multiples, I remain focused elsewhere.

Summary

MAG Silver had a solid Q3 and is on track to generate over $40 million in net income this year and this was achieved even with minimal help from the silver price, which spent most of the year below $24.00/oz. And from a catalyst standpoint, investors will have lots of drill results to look forward to next year and an updated resource at Juanicipio. That said, while MAG Silver has lots of irons in the fire to grow company-wide resources and a highly capable technical team, some of this looks priced into the stock with it trading at 1.0x P/NAV when including exploration upside across its portfolio. In addition, I prefer not to invest in single-asset producers in Tier-2 jurisdictions and while MAG could become a dual-asset producer, this looks to be a 2030 opportunity earliest. In summary, while I see MAG as a top-5 way to get silver exposure, I would only become interested in the stock below US$9.30.