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Mexico has long been a silver juggernaut. The indigenous peoples had
been successfully mining this shiny-white metal since well before the Spanish
colonials swarmed the shores in the 16th century. Several hundred years
of Spanish development globalized Mexico’s silver prowess. And still
today in the post-independence era silver mining is still going strong.
It is believed that Mexico is responsible for a whopping one-third
of all silver ever mined in the history of the world. But despite such
an extensive mining history, there’s still plenty remaining in the
ground. With the miners of yore literally only scratching the surface
via the exploitation of this country’s abundant high-grade outcroppings,
there’s ample silver treasures at depth for the modern miners willing to dig
deeper.
Though the low-hanging fruit is gone, Mexico’s massive precious-metals
belts have been found to hold ample silver resources directly below the
historically-mined deposits. The miners are also using a better
understanding of geology and technological advances to find silver in areas
that didn’t have outcroppings, in virgin ground.
This modern success has yielded a plethora of major discoveries. And
the development of these discoveries has kept Mexico atop the silver
industry. In 2014 it produced an estimated 151m ounces of
silver, a tally that’s 15m+ ounces greater than the world’s next largest
producer. Incredibly Mexico is currently responsible for about 18%
of global mined production.
So if you’re a silver-focused mining company, there’s really no better
place to explore than Mexico. And why not improve your odds by focusing
on this country’s premier silver district, Zacatecas’ Fresnillo district.
The Fresnillo Silver district is located in the heart of a major
geological structure that’s so far yielded 4b+ ounces of silver to
date. It’s estimated that Fresnillo alone is responsible for in the
neighborhood of 10% of the world’s historical production. And
today it holds two of the world’s top-four largest primary silver mines.
Small junior explorer MAG Silver picked the right time and right place for
its foray into the Fresnillo district. The right time was the early
2000s when silver was loathed, prices were low, and land was available.
Mining ventures weren’t popular back then, but MAG’s founders were confident
that silver’s fortunes would soon change.
The right place was of course the Fresnillo district. Now exploring
this district is not necessarily an easy endeavor, or else everyone would be
doing it. Provocatively much of Fresnillo is buried under thick
alluvial cover, offering very little surface clues to the mineralization at
depth. Fresnillo has seen mining for a long time, but the bigger discoveries
have only been made in the last several decades thanks to modern exploration
techniques and drilling technologies.
Many miners have left this district with empty pockets and dreams.
But the allure of massive Fresnillo-style veins always brings more. And
MAG Silver was fortunate enough to find one of those highly-sought-after
sweet spots.
MAG’s geologists were indeed intrigued by results from prospecting work on
the Juanicipio property. But perhaps more intriguing was the fact that
this project had seen very little modern exploration. And this was
surprising given its location only about 5km away from the headframe of the
largest mine in the district.
Juanicipio’s maiden drilling program was wildly successful, with MAG
Silver cutting significant mineralization in the very first holes. Not
surprisingly this success captured the attention of district bellwether and
aforementioned headframe owner Fresnillo PLC (Industrias Peñoles at the time,
which spun off its silver assets in 2008 to form Fresnillo PLC). And it
took advantage of its deep pockets and MAG’s limited working capital to gain
operatorship and an option to earn a 56% majority interest in Juanicipio
(which it eventually exercised).
Ongoing drilling by this newly-formed JV continued to encounter impressive
mineralization. And it eventually zeroed in on Juanicipio’s flagship
Valdecañas vein. To date Valdecañas, which was recently found to be two
overlapping veins, has been traced over 1.6km+ of strike. Its
width averages more than 4 meters, with the bulk of it residing about
400m to 800m below the surface. And per the latest resource estimate,
the main zone contains 208m ounces that grade over 600 g/t.
Valdecañas is one of the world’s most important silver discoveries of the
century, and one of the finest ever in the Fresnillo district. And per
the latest economic assessment, it’ll be very profitable to mine.
The mine will be built as an underground ramp-access operation.
Valdecañas’ ore will be extracted via long-hole retreat stoping
methods. And it’ll feed a flotation mill that will produce silver-rich
lead and zinc concentrates. These concentrates will yield an average of
10m ounces annually over a nearly 15-year mining life, including 14m ounces
per year over the first 6 years thanks to higher grades. Though MAG
Silver’s take is only 44%, its respective 4.5m- and 6.3m-ounce streams will
still make it one of the world’s largest primary silver producers.
And it is the economics that really drive this project home. The
price tag is estimated at only $300m, which is very reasonable for a
large-scale underground mine. And with life-of-mine all-in sustaining
costs projected at only $6.61/ounce, Juanicipio comes with a 33%
after-tax internal rate of return and a capital payback period of less than 4
years (at $18 silver).
This latest study was all Fresnillo PLC needed to confidently proceed with
development. And if Fresnillo is confident, MAG Silver ought to be as
well. Fresnillo, the world’s largest primary silver producer, operates
three nearby mines that extract from similar ore bodies. And
provocatively its brand-new mine on the adjacent property is tapping a vein
that appears to be Valdecañas’ southeastern extension. Fresnillo knows
exactly how to build and operate silver mines in this district.
Following final engineering and permitting, the JV broke ground in
2013. It ended up cutting Juanicipio’s portal before the year was
out. And it is currently in the process of driving the access decline
into the orebody. At a planned advancement rate of 115m per month,
it’ll take about three years to develop this decline. The JV will
construct the mill in the latter portion of decline development. And it
targets the commencement of stope development in early 2017.
If all goes as planned, Juanicipio will ramp up to commercial production
in the first half of 2018. And it’ll be a cash cow for its operators,
even at lower silver prices.
With $86m in cash as of its latest filing, MAG Silver already has a big
chunk of its portion of development capex covered. So really it can
just sit back and enjoy the ride with no immediate pressure to hit up the
markets for more capital. It can be selective in how it chooses to
raise the last portion of its obligations. And it is able to fund
exploration at some of its other wholly-owned projects in search of its
second mine.
MAG Silver has a really bright future as an emerging Mexican silver
producer. And ever since the Valdecañas discovery, its stock has been
an investor favorite. Like all precious-metals mining stocks MAG Silver
has had a rough last few years amidst silver’s cyclical bear market, but it’s
been resilient. And MVG has shown some strength of late as it awaits
silver’s imminent major breakout.
This 4+ year chart shows how MVG (in blue) scrubs up against its primary
driver silver (in red). And not surprisingly, this chart is pretty
ugly. Silver has had a rough ride since its 2011 bull high. And
naturally the mining stocks have followed their underlying metal lower.
There are some positives to take out of this chart though. And this
should excite investors who plan on riding MAG Silver in the long-overdue
mean reversion higher.
Whether bull or bear, one thing I always like to look at is how a stock
performs relative to material movements in the metal. On the downside
it will naturally follow the metal lower. And in the case of risky
mining stocks, it’s no surprise that they can leverage to the downside.
But this leverage should also be apparent on the upside, or else mining
stocks wouldn’t be worth owning. Fortunately MAG Silver fits the bill.
Since 2011 silver has had five meaningful uplegs. And as you can see
MVG has performed well in each, with tight average gains of an impressive 62%.
On the leverage front it’s a mixed bag though, with the first three uplegs in
2012 and 2013 delivering less than 2.0x positive leverage. Now MVG’s
leverage in each of these is still good at 1.8x, 1.9x, and 1.6x, but certainly
not spectacular.
What is spectacular though is MVG’s leverage to gold, silver’s primary driver.
Using gold’s 15%, 15%, and 18% gains over the same periods of time, MVG
positively leverages 4.2x, 4.1x, and 2.9x
respectively. Ultimately MVG’s silver leverage was diluted by the white
metal’s excellent leverage to gold over these uplegs, which wasn’t the case
in the two most recent ones.
In uplegs #4 and #5 silver didn’t positively leverage gold. This
didn’t stop MVG from continuing to deliver stellar positive leverage
though. Its 5.4x and 2.7x leverage showed incredible
strength, signifying investors’ willingness to aggressively buy this stock
upon any meaningful silver ascent.
Also a great sign of strength is the uptrend MVG has carved out over the
last couple years, which is in defiance of silver’s downtrend over this same
period of time. And interestingly these trends have actually made silver
the underperformer since 2011. From its high to this week, MVG is only
down 51% to silver’s 66% loss. This trend is a true anomaly that ought
to be a harbinger of great things to come for MAG Silver.
Overall MAG Silver is one of a handful of elite silver stocks that will
lead the way in silver’s next upleg. It is also one of the 12 stocks
profiled in our latest research
report, the product of 3 months of deep research into the universe of
silver stocks trading in the US and Canada.
Our favorites range from small juniors to some of the world’s largest
producers, all of which have the common goal of leveraging silver
higher. These companies own some of the world’s finest silver
assets. And in general they are well-positioned financially, managerially,
and geopolitically. Buy
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MAG Silver and 11 other high-potential silver stocks!
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The bottom line is MAG Silver is an emerging Mexican silver
producer. Its world-class Juanicipio project is currently in the
development phase. And once in full commercial production, targeted for
2018, it will rank as the world’s sixth-largest primary silver mine.
Even a 44% minority interest will make MAG a major silver producer.
MAG Silver is sitting pretty, remaining well-funded to cover its share of
early development. And it has a reliable partner that knows exactly how
to profitably mine silver in the prolific Fresnillo district. Based on
its performance amidst silver’s downturn, investors consider this stock an
industry elite. And when silver finally regains its bullish form, MVG
ought to be one of the top performers.
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