Expert AnalysisMAG Silver Corp. (MAG:TSX; MVG:NYSE) Brent Cook, Exploration Insights - "I think MAG's robust PEA will attract attention from a possible suitor." (6/17/12)
Expert Analysis
Brent Cook, Exploration Insights (6/17/12) "MAG Silver Corp. released the results of its long-awaited PEA envisioning a standalone underground mining operation exploiting the Valdecanas vein in Mexico. . .the study shows a very robust operation with an after-tax internal rate of return of 43% and NPV5% for MAG's 44% [of the joint venture] of $440M at $23.39/oz silver. . .Valdecanas remains the highest grade and most profitable silver deposit that I know; quality counts for a lot in the mining business and I have to think Fresnillo, or some other suitor, is interested in MAG's 44%. https://www.theaureport.com/pub/co/536#quote
Mag Silver (MAG.TSX) released the results of its long awaited preliminary economic assessment (PEA) envisioning a standalone underground mining operation exploiting the Valdecanas vein in Mexico. This is a joint release with 56% partner Fresnillo who is the operator and owner of the adjacent, world class Fresnillo silver district. The PEA is based on a total indicated and inferred ~200 million ounces of silver plus byproduct metals (Fig. 4 below) that reflect drilling through May 2011. Subsequent drilling has undoubtedly upgraded and expanded the resource.
The study shows a very robust operation (Fig. 5) with an after-tax IRR (internal rate of return) of 43% and NPV5% (net present value) for MAG’s 44% of $440 million, at $23.39 silver. Undiscounted, MAG’s after-tax 44% comes to $951 million. At $30 silver the IRR increases to 53%, and MAG’s 44% of the NPV to $748 million. Every dollar increase in the silver price adds about $75 million to the after-tax NPV. MAG is currently being valued at $467 million.
This is a very detailed PEA incorporating realistic costs, dilution, recovery, etc. that in reality should be considered a pre-feasibility level study at least. Initial capital costs are $302 million ($133 million to MAG) and sustaining capital is $267 million, while cash costs over the life of mine are $6.61 per ounce of silver equivalent produced. The sustaining capital is funded from mining operations, so not an immediate concern for MAG. The mine is envisioned to begin production in 2015 and I would guess underground ramp development could start early next year.
Mining, capital, and sustaining costs are higher than the figures I had previously assumed, which were based on costs at Fresnillo’s nearby operations. Likewise, the 2009 Wardrop Engineering scoping study estimated capital costs of $217 million and operating costs of $42.28 per tonne milled, versus the current study’s $302 million capex and $66.56 per tonne cost. At $14.23 silver, the Wardrop study showed a pre-tax IRR of 52% and NPV5% of $469 million for MAG’s 44%. We are seeing this serious cost escalation across the industry and it is a real issue for marginal deposits. The advantage the Juanicipio joint venture has is that the high grade lessens the “hit” to the mine profit margins.
We had expected a higher NPV at $23 silver, and I missed on my estimated valuation. Nonetheless, Valdecanas remains the highest grade and most profitable silver deposit that I know. Quality counts for a lot in the mining business and I have to think Fresnillo, or some other suitor, is interested in MAG’s 44%. For the time being I intend to hold MAG in the portfolio.
Our concern now is that MAG is down to about $20 million in cash. The Juanicipio joint venture has an $8 million budget and is continuing to drill the Valdecanas vein as well as new exploration targets on the property. MAG has also been aggressively drilling Cinco de Mayo and La Esperanza, thereby draining the treasury. The company has enough in the bank to coast into next year if need be but I would imagine will be looking to finance before year-end. MAG should be able to raise money on the strength of this study, but at what price?