VANCOUVER — Shares of Mag Silver (TSX: MAG; NYSE-AM: MAG) gained as much as 31% to a several month high of $17.87 on the TSX following news of precious metals sector financier Eric Sprott investing $60 million into the soon-to-be silver producer.
The $60-million equity placement saw Sprott buy 4.528 million common shares of Mag Silver at $13.25 apiece to top up the company’s treasury from the US$72.4 million reported as of year-end 2019. Sprott’s investment gives him a direct 5% interest in the company, and according to president and CEO George Paspalas, is Sprott’s “largest single investment in the silver space.”
The funds are primarily earmarked to finance development cash calls at its 44%-owned Juanicipio silver mine project, which is advancing towards production this year in the Fresnillo district of Mexico’s Zacatecas state.
The company’s plan to raise capital was recently flagged by its filing of a short form base shelf prospectus clearing the potential to raise up to US$250 million over the next two years through one or a series of issuances.
Juanicipio is operated by Mag Silver’s Mexican-based joint venture partner and world’s largest silver producer Fresnillo (LSE: FRES; US-OTC: FNLPF), which owns 56% of the high-grade silver project. The partners approved Juanicipio mine development plans in April 2019 and launched the underground construction process, which is currently underway with more than 26 km of underground development reported complete.
Initial mine production is anticipated in mid-2020, with the ore being processed at Fresnillo’s nearby mill facilities until the new 4,000-tonne-per-day processing plant at Juanicipio is completed and commissioned in mid-2021.
Based on Mag Silver’s 2017 preliminary economic assessment (PEA) of Juanicipio, the mine is anticipated to deliver average annual payable production of 9.6 million oz. silver, 39,500 oz. gold, 68.4 million lb. zinc and 42.7 million lb. lead over a modelled 19-year mine life.
The early state study forecasts all-in sustaining costs (AISCs) of US$5.02 per oz. silver and pegs initial capital costs of US$360 million, with payback in less than two years after plant start-up. The after-tax net present value at a 5% discount rate came in at US$1.14 billion along with a 44.5% internal rate of return.
Juanicipio is located in the Fresnillo silver trend, where historic silver production has exceeded 6.2 billion oz., or about 10% of the world’s historic production of the metal.
Mineralization at Juanicipio consists of high-grade silver-gold-lead-zinc epithermal vein systems. The principal mineralized structure at the deposit is the Valdecañas vein system that hosts total indicated resources of 12.8 million tonnes grading 427 grams silver per tonne, 2.1 grams gold per tonne, 2.1% lead and 3.7% zinc for a contained metal tally of 176 million oz. silver, 867,000 oz. gold, 598 million lb. lead and 1.04 billion lb. zinc. The system also hosts additional inferred resources of 12.1 million tonnes of 232 grams silver, 1.4 grams gold, 2.5% lead and 4.7% zinc for contained metal of 91 million oz. silver, 562,000 oz. gold, 658 million lb. lead and 1.25 billion lb. of zinc.
Valdecañas is a vertically zoned vein system comprised of an upper silver-rich section, the Bonanza zone discovered in 2006, and a lower base metal-rich zone, the Deep zone, discovered in 2015.
Additional mineralized vein systems, including the Anticipada, Pre-Anticipada and the Venadas 1 and 2, have been subsequently discovered through exploration around the deposit.
Development operations at Juanicipio, like most mining operations in Mexico, were dealt a setback in April 2020 with a notification from the government to temporarily suspend all non-essential activities until May 30, as an effort to slow the spread of COVID-19 in the country. Mag Silver reported that surface exploration and construction work was temporarily stopped, and underground operations have been temporarily reduced to minimum working levels.
Mag Silver enjoys a strong institutional shareholder base looking for silver exposure. The company reports institutions constitute approximately 78% of its shareholders, while just 22% of its ownership is by retail shareholders and in the float.
Sellside analysts were generally positive on the $60-million financing.
TD Securities mining analyst Craig Hutchison described the financing as positive, maintained his speculative buy rating on the company and boosted his 12-month target price from $19.50 to $22.00 per share.
“The equity offering significantly de-risks any financing overhangs for Mag Silver, particularly in light of the volatility in the equity markets combined with the potential for development delays at Juanicipio related to COVID-19,” Hutchison wrote in a research note.
Bhakti Pavani, a research analyst at U.S.-based Alliance Global Partners, also reacted positively. “The financing bridges Mag Silver’s funding gap and removes the overhang on the stock,” she commented in a note to clients. Pavani maintained her buy rating on the stock and raised the target price from US$15.70 to US$16.00 per share.
Mag Silver initially acquired a 100% interest in the Juanicipio project in 2003. From 2005 to 2007, Peñoles (a predecessor company of Fresnillo prior to their 2008 merger) earned a 56% interest in the project by undertaking US$5 million of exploration and investing US$1 million into the company, which subsequently established the current Fresnillo-Mag Silver joint venture.
At press time, shares in the company closed at $15.83 on the TSX, giving it a market capitalization of $1.44 billion based on its 91 million common shares outstanding. The stock has a 52-week trading range of $5.33-$18.60.