With its new Juanicipio processing plant in Mexico moving toward capacity and its production numbers surpassing expectations, MAG Silver Corp. (MAG:TSX; MAG:NYSE American) has released its second-quarter earnings figures.
The silver producer reported a net income of US$19.4 million, or US$0.19 per share, for the three months ending June 30, vs. US$7.6 million or US$0.08 per share for the same three months in 2022.
After the completion of the plant's startup phase, about 4.4 million ounces of silver (Moz Ag) were produced at the plant between March 2023 and the end of June. Production is expected to increase steadily through the third quarter until the plant reaches its design capacity of 4,000 tonnes per day (tpd).
"The ramp-up so far at Juanicipio has gone very well, and we expect strong positive FCF (free cash flow) generation now that the mine is in commercial production, with development capex winding down," wrote Cormark Securities analyst Nicolas Dion in an updated research note.
"Despite this, MAG is trading at the low end of its range," wrote Dion, who rated the stock a Buy with a US$24 per share target price. "We see having Fresnillo as the operator as a key advantage, and the transition to full-scale production in H2/23 could be a catalyst to drive the multiple higher. MAG is our pick for a quality silver name."
"The ramp-up so far at Juanicipio has gone very well, and we expect strong positive FCF (free cash flow) generation now that the mine is in commercial production, with development capex winding down," wrote Cormark Securities analyst Nicolas Dion in an updated research note.
MAG said the plant has been operating at or above 85% of that design capacity, with silver recovery consistently above 88%. The average silver head grade for the quarter was 498 grams per tonne (g/t).
The company said a total of 377,018 tonnes of mineralized material was processed through the Juanicipio plant and two plants owned by Juanicipio joint operator Fresnillo Plc. during the second quarter, including 4,877,460 payable silver ounces, 9,537 payable gold ounces, 3,066 payable lead tonnes, and 4,582 payable zinc tonnes sold. MAG Silver receives 44% of the income.
"We expect Juanicipio to generate significant positive FCF starting in Q3/23, while MAG ramps up exploration at Larder and Deer Trail," Dion wrote of two of MAG's other projects, in Ontario and Utah, respectively.
The Catalyst: Mexico Plant Online
H.C. Wainwright & Co. analyst Heiko F. Ihle also maintained a Buy rating on the stock with a US$20.50 per share target price.
"Following the successful commissioning period of Juanicipio's processing facility, the operation continues to perform in line with expectations," Ihle wrote in a research note on Wednesday.
H.C. Wainwright & Co. analyst Heiko F. Ihle also maintained a Buy rating on the stock with a US$20.50 per share target price.
The firm’s increased earnings were based on higher net revenues of US$134.8 million, which grew from US$55.2 million in Q2 2022, the analyst noted.
Analyst Don DeMarco with National Bank of Canada Financial Markets ascribed a "positive bias" to the results.
"We expect the JV (joint venture with Fresnillo) cash balance to follow higher in Q3/23, and production to remain supported over the coming quarters," he wrote in a note on Tuesday. "We are becoming more constructive on MAG as Juanicipio (transitions) to producer de-risked, and (looks) to details on costs, guidance, and an updated TR (total revenue) in coming quarters."
Analyst: 'One of the Better Options' for Silver Investors
MAG is mining the Bonanza zone of the Valdecañas vein system in the Zacatecas state of Mexico. A preliminary economic assessment (PEA) in 2017 estimated a 19-year mine life.
Analyst Don DeMarco with National Bank of Canada Financial Markets ascribed a "positive bias" to the results.
The company's focus is turning from construction to optimization at the plant, analyst Craig Hutchison of TD Securities wrote.
"With all major construction work now complete, the operation team is looking to improve and optimize the mine to achieve and potentially exceed design capacities," wrote Hutchison, who has rated MAG a Speculative Buy with a CA$24 per share target price. "Investments in Juanicipio should be largely done by mid-year, and we expect MAG to start receiving its share (44%) of dividends from 2024."
Analyst Brian MacArthur of Raymond James wrote that those dividends would make the stock even more attractive.
"We believe that MAG is one of the better options for investors looking for exposure to silver," MacArthur wrote, rating the stock Outperform with a target of CA$23 per share.
Mined Output Worldwide to Decline
Silver is the conductive element in nature and is used to coat electrical contacts in computers, phones, cars, and appliances. It's also an important element in solar technology.
The World Silver Survey 2023, published by the Silver Institute, said there was a 237.7 Moz deficit between supply and demand for the precious metal in 2022. This deficit is likely to be repeated in 2023, the institute said.
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MAG Silver Corp. (MAG:TSX; MAG:NYSE American)
"Mined output over the longer term, four to five years out, is forecast to begin to decline," the report said. "This will be due to losses from grade decline and reserve depletion at existing operations exceeding the new production that is expected to come online from the current project pipeline."
Ownership and Share Structure
Institutions own 70% of MAG, and 30% is retail, according to the company.
Top institutional shareholders include Juanicipio project operator Fresnillo Plc. with 9.1%, BlackRock Asset Management at 9.9%, ETF Managers Group LLC at 5.3%, Sprott Asset Management at 5.1%, and First Eagle Investment Management at 5.6%, the company said.
MAG Silver has a market cap of CA$ 1.5 billion. It has 102.9 million shares outstanding, according to TSX Infosuite. It trades in a 52-week range of US$17.02 and US$10.475.
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