Silver Producer Increases Guidance as Mexico Plant Hits Stride

MAG Silver Corp. (MAG:TSX; MAG:NYSE American) announced its unaudited financial results for the quarter ending June 30, 2024, quick on the heels of news that it beat predictions for production and increased head grades at its Juanicipio plant in Mexico during the same quarter.

The Tier I silver producer said it had a net income of US$21.6 million, or US$0.21 per share, driven by more than US$25.1 million in income from the Juancipio joint venture (JV) with Fresnillo Plc., and adjusted EBITDA of US$50.3 million.

The EPS aligned with consensus and its own analysts' estimates, BMO Capital Markets analyst Kevin O'Halloran wrote in and updated note on Aug. 2.

"Juanicipio continued to display its ability to generate strong cashflow, with operating cashflow of US$93M facilitating FCF of US$89M, an increase from US$28M in Q1," wrote O'Halloran, who rated the stock Outperform with a CA$24 per share target price. "Following an outperformance in H1 and after increasing grade guidance in July 2024, silver production guidance has been revised higher and AISC guidance lower."

Fresnillo owns 56% of the Juanicipio JV and MAG owns 44%.

MAG said Juanicipio processed a total of 336,592 tonnes of ore at a silver head grade of 498 grams per tonne (g/t), with an equivalent silver head grade of 746 g/t, during the quarter. It achieved silver production and equivalent silver production of 5.0 and 7.1 million Ounces (Moz), respectively.

"MAG pre-reported impressive Q2 silver production at Juanicipio of 4.98 Moz, exceeding our 3.68 Moz estimate by 35%, and totaling 9.4 Moz in H1," O'Halloran wrote. "Q2's silver grade of 498g/t was a strong beat to our 400 g/t" estimate.

The Catalyst: Continued Operational Outperformance

The company noted that Juanicipio continued to improve on robust Q1 performance with cash cost of US$1.15 per silver ounce sold (US$8.86 per equivalent silver ounce sold) and all-in sustaining cost of US$4.49 per silver ounce sold (US$11.31 per equivalent silver ounce sold).

Full-year guidance for Juanicipio has been increased based on the continued operational outperformance in the first half of the year. As reported by Fresnillo, the mine's operator, silver head grade at Juanicipio is expected to be between 420 g/t and 460 g/t for 2024 (the previous guidance was 380 g/t to 420 g/t), MAG said.

BMO Capital Markets analyst Kevin O'Halloran  rated the stock Outperform with a CA$24 per share target price. 

Juanicipio is expected to produce between 16.3 million and 17.3 million (previously 14.3 million and 15.8 million) silver ounces, yielding between 14.5 million and 15.4 million (previously 13.2 million and 14.6 million) silver ounces sold at all-in sustaining costs of between US$8.50 and US$9.25 (previously US$9.50 and US$10.50) per silver ounce sold.

The mine also "returned a total of US$29.8 million in interest and loan principal repayments to MAG, further augmenting MAG’s liquidity position to US$97.3 million at the end of the quarter," MAG said in a release.

"Juanicipio continued to display its ability to generate strong cashflow, with operating cashflow of US$93 million facilitating FCF (free cash flow) of US$89 million, an increase from US$28 million in Q1," O'Halloran with BMO noted. "Following an outperformance in H1 and after increasing grade guidance in July 2024, silver production guidance has been revised higher."

'An Impressive Quarter'

MAG processed 336,593 tonnes of ore through Juanicipio during Q2, it reported earlier this month.

"Production was better than expected overall, which we attribute to higher grades and recoveries compared to our expectations," analyst Joe Reagor of Roth MKM wrote in an updated research note at the time. "Additionally, management announced an increase in its 2024 full-year silver head grade guidance. As a result of these factors, we are increasing our price target" and maintaining a Buy rating.

Consistent with the first quarter, MAG noted that all of the ore in Q2 was processed through Juanicipio and not any of Fresnillo's other plants.

"The second quarter continued to validate the strength and quality of our operations at Juanicipio," MAG President and Chief Executive Officer George Paspalas said. "We achieved solid milling rates, improvements in recovery, and exceptional head grades in a very supportive commodity price environment. With the robust foundation of the first half of 2024, increased silver grade guidance, and ongoing project optimization, we remain confident we are well positioned for continued growth and long-term success."

O'Halloran called Q2 "an impressive quarter" for Juanicipio. "The operation also displayed q/q improvements in throughput and recovery," he wrote.

A Silver Bull?

The most conductive element in nature and important to the green energy transition for coating electrical contacts in computers, phones, cars, and appliances, silver is also an important element in solar technology.

Spot prices rose to a new all-time high of US$32.43 per ounce on May 20 but have remained volatile. The price was US$28.51 on Wednesday.

"Keep in mind that silver is not gold, and I think a lot of people are unfortunately learning that," wrote Christopher Lewis for FX Empire. "They play silver because it's cheaper in price. And therefore, they think that they can buy more of it and really jack up their leverage. And while that is true to a point, it also means you can get your face ripped off. And that is essentially what's happening to most of the people that jumped in right away after the Bureau of Labor Statistics announced that the United States added 114,000 jobs last month, instead of the expected 175,000."

However, some are still predicting higher prices and bullish forecasts. JP Morgan, for example, has predicted silver prices will average US$36 per ounce by next year.

According to the Silver Institute's World Silver Survey, global demand for silver "massively exceeded" supply last year, a deficit that is expected to extend into a fourth consecutive year in 2024.

Mordor Intelligence noted that the white metal is expected to register a compound annual growth rate (CAGR) of more than 5% between 2024 and 2029.

"An increase in the demand for new technological products is expected to help the market expand in the future," Mordor analysts wrote. According to a U.S. Geological Survey report, "27% of the silver produced in the United States was being utilized in electrical and electronic applications."

Ownership and Share Structure

Institutions own 70% of MAG, and 30% is retail, according to the company.

Top institutional shareholders include Juanicipio operator Fresnillo Plc. with 9%, BlackRock Investment Management (UK) Ltd. with 10.8%, Van Eck Associates Corp. with 9%, First Eagle Investment Management LLC with 6.2%, and Sprott Asset Management LP with 3%, the company said.

MAG Silver has a market cap of US$1.31 billion. It has 103.14 million shares outstanding, according to Reuters. It trades in a 52-week range of US$14.30 and US$8.20.

Important Disclosures:

1. MAG Silver Corp. is a billboard sponsor of Streetwise Reports and pays SWR a monthly sponsorship fee between US$4,000 and US$5,000.
2. Steve Sobek wrote this article for Streetwise Reports LLC and provides services to Streetwise Reports as an employee.
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