MAG Silver Corp. (MAG:TSX; MAG:NYSE American) released an updated technical report on Juanicipio, its joint venture project in Mexico with Fresnillo, which "confirms robust economics," reported ROTH Capital Markets analyst Joe Reagor in a March 27 research note. However, some differences between estimates in the report and in ROTH's model led the investment bank to lower its target price on the Canadian silver producer to $14 per share from $15.50.
That said, Reagor wrote, "We are maintaining our Buy rating as we continue to believe MAG is undervalued by the market. Additionally, we continue to believe the market significantly undervalues the potential for new discoveries on the project."
In comparison to the new target, noted the analyst, MAG's current price is $9.01 per share, and this implies a 55% return for investors.
Overall strong economics
Reagor highlighted that the newly outlined economics of Juanicipio overall are favorable.
"The technical report showed a robust net present value of $1.2 billion ($1.2B) after tax on base case prices, or $1.48B at current spot prices," he wrote.
The report noted an increase in the size of the existing resource at Juanicipio, and it included a maiden mineral reserve estimate, both positives, noted Reagor. These updates led to ROTH adding four years to its mine life estimate for this project.
Reasons for target price reduction
Where the technical report diverges from ROTH's model is in its lower estimates for sustaining capital and for metal recoveries, Reagor pointed out. Accounting for these differences led to ROTH lowering its target price on MAG.
Specifically, the report estimates sustaining capital over the mine life, of 13 years, to be $413 million. As well as being higher than ROTH's forecast, this figure represents a "significant" increase over the amount in the previous preliminary economic assessment.
"We had estimated inflation would increase these costs but not to the extent in the technical report," he wrote.
Regarding recoveries, the report's estimate for gold recovery is higher than ROTH's forecast but its projected recovery rates for silver, lead and zinc are lower.
"We note management described these estimates as conservative as they were based on initial startup data," added Reagor.
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