Transition to Silver Producer Fuels Co.'s 3Q Earnings

MAG Silver Corp. (MAG:TSX; MAG:NYSE American) has released its third-quarter earnings figures as its new Juanicipio processing plant in Mexico is hitting production and nameplate capacity, helping the company make the full transition to being a producer.

MAG reported a net income of US$8.9 million or 9 cents per share in the three months ending Sept. 30, compared to US$8.2 million or 8 cents per share in the same quarter of 2022.

The silver company also recorded US$13.7 million from its 44% share of income from the plant, income from operations, and loan interest. Fresnillo Plc is joint operator and receives 56%.

A total of 322,249 and 921,990 tonnes of mineralized material were processed in the Juanicipio and Fresnillo's Saucito plant during the quarter, respectively, the company said. No feed was supplied to Saucito or Fresnillo's other nearby plant in August or September.

"As Juanicipio ramped up its operations and transitioned to full capacity, there was a progressive reduction of Juanicipio’s reliance on the nearby Fresnillo and Saucito plants," noted Raymond James analyst Brian MacArthur in an updated research note. He rated the stock Outperform and set a target price of CA$21 per share.

Raymond James analyst Brian MacArthur rated the stock Outperform and set a target price of CA$21 per share.

"This transition had a direct impact on total milling and, consequently, overall production for the quarter, but this was offset by higher grade feed and continued efforts to optimize the Juanicipio plant as it ramped up to full capacity," MacArthur wrote.

The average head grade for the three and nine months ending September 30 was 523 and 474 grams per

Tonne (g/t), yielding silver production of 4.78 million ounces (Moz) and 12.29 Moz, respectively.

"Following a successful commissioning and ramp-up period, the Juanicipio processing facility achieved nameplate capacity during September 2023, with silver recovery consistently above 88%, marking a step change in performance relative to the comparative quarter and a successful transition to a fully independent producer," the company noted in a release.

Juanicipio delivered a cash cost of $4.68 per silver ounce sold and an all-in-sustaining cost of US$9.19 per silver ounce sold in Q3.

"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 a recent 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. "MAG is our pick for a quality silver name."

MacArthur had similar thoughts. "We believe that MAG is one of the better options for investors looking for exposure to silver," he wrote.

The Catalyst: Production Results Ahead of Expectations

The company noted that sales increased by more than US$75 million during Q3, mainly because of 76%-higher metal volumes and 28%-higher realized metal prices.

The plant generated strong cash flow of US$57.3 million and free cash flow of US$40.6 million during the quarter. Juanicipio held cash balances of US$23.4 million by Sept. 30. That was an increase of US$14.9 million over the Q2, mostly because the mine is reaching intended production levels.

Analysts Kieron Hodgson and Edward Gooden from Panmure Gordon noted that MAG's "financial position continues to improve."

"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 a recent research note.

"MAG announced production results on 25 October that were ahead of our previous expectations, due to some of the highest silver grades of any major operation," wrote the analysts, who rate the stock a Buy with a CA$22 per share target price. "Grades continue to improve with Q3 FY2023 grades of 1.32g/t exceeding that of both the previous quarter and the previous year."

Analysts Ovais Habib and Eric Winmill of Scotiabank Global Equity Research wrote that the EPS of US$0.09 was in line with their estimate of US$0.08.

"We view the results as a mild positive for MAG shares as the JV generated strong FCF (free cash flow) that aligned with expectations as the Juanicipio mill continues to ramp up," the analysts wrote. "We look forward to visiting the Juanicipio mine site on November 21, along with more future cash distributions from the Juanicipio JV."

H.C. Wainwright & Co. analyst Heiko F. Ihle placed 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.

Supply Deficits Likely to Continue

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.

The most conductive element in nature, silver is used to coat electrical contacts in computers, phones, cars, and appliances. It's also an important element in solar technology.

Analysts Kieron Hodgson and Edward Gooden from Panmure Gordon noted that MAG's "financial position continues to improve."

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.

"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$ 1.39 billion. It has 102.9 million shares outstanding, according to TSX Infosuite. It trades in a 52-week range of US$22.96 and US$13.26.

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2. Steve Sobek wrote this article for Streetwise Reports LLC and provides services to Streetwise Reports as an employee.
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