Investment Thesis
MAG Silver Corp. (NYSE:MAG) is a Canadian precious metals mining company, which is listed both in the U.S. and Canada (TSX:MAG:CA). The reporting currency is U.S. Dollars. I have covered the company a few times in the past, and those articles can be found here.
The company gets most of its value from the 44% ownership interest of Juanicipio in Mexico, where Fresnillo plc (OTCPK:FNLPF) is the operator and owns the remaining share. There are also the exploration projects Larder in Canada and Deer Trail in the U.S. However, I will focus on Juanicipio and company financials in this article, as the exploration projects have yet to produce more material results.
Figure 1 – Source: MAG Silver Corporate Presentation
MAG Silver did earlier today release its Q3 23 financials, which the article will partly focus on. The stock price of MAG Silver has underperformed drastically this year, which is saying something given that most silver miners have had lackluster returns. Apart from a poorly received deal earlier in the year, there is little reason for MAG Silver to have underperformed to such a degree, especially when the ramp-up of Juanicipio in 2023 has been relatively seamless.
Figure 2 – Source: Koyfin
Q3 23 Result
Most of the production from Juanicipio is from silver, but the mine also produces more minor amounts of gold, lead, and zinc. The revenue breakdown from the most recent quarter can be seen in the chart below.
Figure 3 – Source: Data from MAG Silver Q3-MDA
Juanicipio did on a 100% basis produce 4.3Moz of silver and had 6.0Moz of silver equivalent production in Q3. For MAG, the silver equivalent production would consequently be 2.6Moz in Q3. The production numbers are down slightly compared to Q2, but the prior quarter had more production at the Saucito and Fresnillo plants, while 92% of all material was in Q3 processed at the Juanicipio plant, which in September this year reached nameplate capacity.
The cash cost at Juanicipio was in the most recent quarter $4.68/oz, and AISC was $9.19/oz, which is of course extremely impressive numbers. AISC was during the first 9 months of 2023 a very competitive $10.76/oz.
Figure 4 – Source: MAG Silver Quarterly Reports
Juanicipio did in Q3 generate $57.3M in operating cash flow and $40.6M in free cash flow, where $11.3M was returned to MAG Silver from a loan, which meant that Q3 was the first quarter whereas MAG reported a positive free cash flow. More substantial cash flows are likely to follow over the coming year.
MAG Silver did in the most recent quarter report $29.9M in adjusted EBITDA, $8.9M in net income, and free cash flow was $6.1M.
Figure 5 – Source: MAG Silver Quarterly Reports
Valuation & Conclusion
It is important to note that many of the numbers above are for Juanicipio on a consolidated basis, whereas MAG Silver only owns 44%. There will also be additional expenses and capital investments for MAG on top of those included in the Juanicipio AISC.
We will likely get more clarity on the production levels and costs going forward when an updated technical report is scheduled to be released in early 2024. However, I have for 2024 assumed 12Moz of silver equivalent production for MAG Silver, with an AISC of $11/oz for Juanicipio. I have on top of that assumed $35M to account for additional expenses and capex, which aren’t covered by the $11/oz AISC.
Based on the latest financials and a stock price of $9.63 at the time of this writing, we get the following free cash flow yields.
Figure 6 – Source: My Estimates
We are looking at a free cash flow yield in the 10-12% range based on current metal prices, where at least I think there is more upside risk than downside risk to metal prices at these levels. Even though MAG Silver is a single-asset producer, this is in my view an extremely good valuation for a company with some of the lowest costs in the industry.
Based on what we have seen over the last few quarters, everything is looking to roughly be going according to plan, but I would not completely disregard the execution risk, even if it has decreased drastically over the last few quarters. However, MAG Silver Corp. investors are well compensated for that risk at this level in my view, where it is important to remember that MAG Silver is debt-free, has $58.5M in cash as of Q3, and now also a $40M senior secured revolving credit facility on hand.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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