Cash From Tier 1 Asset Flows to Silver Producer
As MAG Silver Corp. emerges as a producer with its Tier 1 Juanicipio mine in Mexico and output is beating estimates. Find out why at least one analyst thinks more of the fruits from the joint venture could land in investors' pockets.
As MAG Silver Corp. (MAG:TSX; MAG:NYSE American) emerges as a producer with its Tier 1 Juanicipio mine in Mexico and output is beating estimates, analysts are paying attention and predicting good things for shareholders.
The Juanicipio joint venture (JV), which the company owns 44% interest in, returned more than US$17.5 million in interest and loan principal repayments to MAG during the first quarter of 2024, the company said while announcing its highlights and financials for the quarter on Tuesday.
"We view this as a significant development as this allowed the company to report an increase in its cash balance despite spending (US)$5.1 million on exploration at other projects and acquiring the Goldstake project for (US)$3.8 million," wrote Roth MKM analyst Joe Reagor in an updated research note.
"We believe cash distributions are likely to increase in the quarters ahead, allowing MAG to consider paying a dividend by year-end 2024," continued Reagor, who reiterated his Buy rating on the stock and increased the price target from US$14 to US$14.50 per share.
For the quarter, the company reported net income of US$14.9 million, or US$0.14 per share, driven by (equity accounted) income from Juanicipio of US$19.24 million and adjusted EBITDA of US$32.45 million.
"On a 100% basis, the Juanicipio JV reported (US)$123.7 million in revenue, beating our (US)$115.8 million estimate," Reagor wrote. "The JV revenue beat was driven by higher payability on metal sales. As a result, we increased our long-term payability assumptions."
The Catalyst: Steady Cash Flow
The company reported strong operating cost performance at Juanicipio, with cash costs and all-in sustaining costs (AISC) of US$8.66 per ounce silver (Ag) and US$11.22 per ounce Ag Eq (silver equivalent), beating BMO Capital Markets analyst Kevin O'Halloran's expectations of US$11.25 per ounce Ag and US$13.07 per ounce Ag Eq.
"We believe cash distributions are likely to increase in the quarters ahead, allowing MAG to consider paying a dividend by year-end 2024," continued Reagor."We are encouraged by the accelerating pace of cash distributions from the Juanicipio JV, and we expect the market will react positively to a growing track record of capital returns," wrote O'Halloran, who rated the stock Outperform with a CA$24 per share target price.
MAG said it had cash totaling US$74.7 million as of March 31, 2024, compared to USA$68.7 million on December 31, 2023.
Analyst Stephen Soock of Stifel in April predicted US$16 million would be returned in principal and loan interest from the JV, and that the company would have US$77 in cash at the end of the first quarter, nearly spot on to the amounts reported by MAG.
"We expect the cash flow to be steady now that the operation is at steady state and look forward to MAG returning capital to shareholders starting in Q3 this year," Soock wrote. He rated the stock a Buy with a CA$20.50 per share target.
"The company wants to establish (US)$100 (million) in cash on their balance sheet (achieved late in Q2) to fund three years of exploration and corporate overhead before distributing profits to shareholders," Soock wrote.
A Productive First Quarter
The mine had a productive first quarter, processing more than 325,000 metric tons of ore, with a notable daily milling rate of 4,387 tons despite undergoing a routine maintenance shutdown. The silver head grade was 476 grams per tonne (g/t), with an equivalent silver head grade if 713 g/t.
Juanicipio achieved silver production and equivalent silver production of 4.5 million ounces (Moz) and 6.4 Moz, respectively, during the quarter, highlighting the mine's potential for sustained high-grade output.
The mine also delivered robust cost performance with a cash cost of US$2.50 per silver ounce sold and an AISC of $6.11 per silver ounce sold, MAG noted.
Juanicipio is in the Bonanza zone of the Valdeca?as vein system in the Zacatecas state of Mexico. A preliminary economic assessment (PEA) in 2017 estimated a 19-year mine life.
The updated National Instrument 43-101 compliant report for the mine, released last month, found mineral resources grew 33% from the original PEA to 17 million tonnes (Mt) at grades of 310 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.
A 'Real Cash Cow' for Company
Almost as soon as MAG released the technical report, silver prices began breaking out. As of Tuesday, spot silver per ounce was up 19.28% since the beginning of the year, USA Today reported.
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.
According to FX Empire, there could be more volatility in the silver market as investors anticipate the release of April Consumer Price Index data on Wednesday.
Streetwise Ownership Overview*
MAG Silver Corp. (MAG:TSX; MAG:NYSE American)
*Share Structureas of 11/30/2023Source: MAG Silver Corp."If the CPI shows that inflation is cooling more than expected, or if employment figures show further weakening in the job market, silver could see an increase in value as the likelihood of an earlier interest rate cut becomes more feasible," the website noted.
Ownership and Share Structure
Institutions own 70% of MAG, and 30% is retail, according to the company.
Top institutional shareholders include Juanicipio 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$1.33 billion. It has 102.97 million shares outstanding, according to Reuters. It trades in a 52-week range of US$13.39 and US$8.20.
| Want to be the first to know about interestingSilver investment ideas?Sign up to receive the FREE Streetwise Reports' newsletter. | Subscribe |
Important Disclosures:
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.Steve Sobek wrote this article for Streetwise Reports LLC and provides services to Streetwise Reports as an employee. This article does not constitute investment advice and is not a solicitation for any investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Each reader is encouraged to consult with his or her personal financial adviser and perform their own comprehensive investment research. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company.For additional disclosures, please click here.