Tier 1 Silver Producer To Option Non-Flagship Mexican Project

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.
3. This article does not constitute investment advice and is not a solicitation for any investment. Streetwise Reports does not render general or specific investment advice and the information on Streetwise Reports should not be considered a recommendation to buy or sell any security. Each reader is encouraged to consult with his or her personal financial adviser and perform their own comprehensive investment research. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer. Streetwise Reports does not endorse or recommend the business, products, services or securities of any company. 

For additional disclosures, please click here.

MAG Silver Corp. (MAG:TSX; MAG:NYSE American) has entered into an exploration, earn-in, and option agreement with Apollo Silver Corp. under which Apollo has the option to acquire MAG's Cinco de Mayo project in the Chihuahua state of Mexico.

Cinco de Mayo comprises 29 concessions totaling about 25,000 hectares and is located in the north-central part of Chihuahua, about 190 kilometers northwest of the state capital. The project area is located immediately west of the village of Benito Juarez and benefits from excellent access through local dirt roads.

"Cinco de Mayo marks the beginning of our transformation as a company," Apollo Chairman and Interim Chief Executive Officer Andrew Bowering said. "We have successfully mitigated single-asset risk by now boasting a portfolio of two exciting projects in two pro-mining jurisdictions. Much of our group has considerable experience in Mexico and we are excited to begin the work to unlock value at Cinco de Mayo for all our stakeholders."

According to Apollo, the project is prospective for and hosts carbonate-replacement-type deposits (CRD), including the Upper Manto lead-zinc-silver-gold deposit, which consists of two parallel and overlapping manto deposits referred to as the Jose Manto and the Bridge zone. The project also hosts the Pozo Seco molybdenum-gold deposit.

The two deposits host distinctly different mineralization with different commodities and are separated by 4 kilometers.

According to the release, 445 holes totaling 213,591 meters were drilled on the project through 2012. Of these, 151 holes totaling 97,610 meters are located at or nearby the Upper Manto deposit and were used to model the mineralization.

A technical report from 2012 used an NSR (net smelter return royalty) cut-off of US$100 per tonne to estimate an inferred resource of 12.45 million tonnes (Mt) of 132 grams per tonne silver (g/t Ag), 2.86% lead (Pb), 6.47% zinc (Zn), and 0.24 g/t gold (Au). The total contained metals in the historical resource are 52.7 million ounces (Moz) silver, 785 million pounds lead, 1,777 million pounds zinc, and 96,000 Moz gold.

Terms of Option Agreement

Under the terms of the transaction, Apollo has been granted an option to acquire all of the outstanding share capital of the MAG subsidiary that is the registered owner of the project's concessions.

To exercise the option, Apollo must obtain the necessary licensing to access and complete no less than 20,000 meters of exploratory drilling, all within a five-year period. Upon exercise of the option and subject to the final approval of the TSX Venture Exchange, the company will issue to MAG common shares equivalent to 19.9% of the then-issued and outstanding common shares of the company on a non-diluted basis.

During the option term, the company will control all exploration and development activities on the project and will be responsible for all expenses associated with maintaining the project, according to the release. Following exercise of the option, MAG will have certain rights allowing it to maintain its percentage ownership interest in the company.

Cinco de Mayo hosts a potential new discovery called the Pegaso zone, which was drilled in 2012. Consisting of 61.6 meters of massive sulfide in a deeper hole, it was not included in the 2012 historical resource estimate.

"This intercept is considered a high-priority target and has potential to be a significant new discovery," Apollo said in the release. "The company's initial review of historical data suggests that the Pegaso zone could indicate a larger and higher-grade resource at depth."

Flagship Generating Strong Cashflow

Meanwhile, MAG's flagship Juanicipio plant, also in Mexico, continues to "display its ability to generate strong cashflow," BMO Capital Markets Analyst Kevin O'Halloran wrote after MAG announced that it had beat production predictions for the second quarter and increased head grades at the plant.

The Tier I silver producer said it had a net income of US$21.6 million in the quarter ending June 30, 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. Fresnillo owns 56% of the Juanicipio JV and MAG owns 44%.

In an updated research note on August 2, O'Halloran wrote that Juanicipio continued to display its ability to generate strong cashflow, rating the stock Outperform with a CA$24 per share target price.

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

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$1.48 billion. It has 103.14 million shares outstanding, according to Reuters. It trades in a 52-week range of US$14.81 and US$8.20.