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Emerging Mexican Silver

Commodities / Gold and Silver Stocks 2015 May 01, 2015 - 04:54 PM GMT

By: Zeal_LLC

Commodities

Mexico has long been a silver juggernaut.  The indigenous peoples had been successfully mining this shiny-white metal since well before the Spanish colonials swarmed the shores in the 16th century.  Several hundred years of Spanish development globalized Mexico’s silver prowess.  And still today in the post-independence era silver mining is still going strong.

It is believed that Mexico is responsible for a whopping one-third of all silver ever mined in the history of the world.  But despite such an extensive mining history, there’s still plenty remaining in the ground.  With the miners of yore literally only scratching the surface via the exploitation of this country’s abundant high-grade outcroppings, there’s ample silver treasures at depth for the modern miners willing to dig deeper.


Though the low-hanging fruit is gone, Mexico’s massive precious-metals belts have been found to hold ample silver resources directly below the historically-mined deposits.  The miners are also using a better understanding of geology and technological advances to find silver in areas that didn’t have outcroppings, in virgin ground.

This modern success has yielded a plethora of major discoveries.  And the development of these discoveries has kept Mexico atop the silver industry.  In 2014 it produced an estimated 151m ounces of silver, a tally that’s 15m+ ounces greater than the world’s next largest producer.  Incredibly Mexico is currently responsible for about 18% of global mined production.

So if you’re a silver-focused mining company, there’s really no better place to explore than Mexico.  And why not improve your odds by focusing on this country’s premier silver district, Zacatecas’ Fresnillo district.

The Fresnillo Silver district is located in the heart of a major geological structure that’s so far yielded 4b+ ounces of silver to date.  It’s estimated that Fresnillo alone is responsible for in the neighborhood of 10% of the world’s historical production.  And today it holds two of the world’s top-four largest primary silver mines.

Small junior explorer MAG Silver picked the right time and right place for its foray into the Fresnillo district.  The right time was the early 2000s when silver was loathed, prices were low, and land was available.  Mining ventures weren’t popular back then, but MAG’s founders were confident that silver’s fortunes would soon change.

The right place was of course the Fresnillo district.  Now exploring this district is not necessarily an easy endeavor, or else everyone would be doing it.  Provocatively much of Fresnillo is buried under thick alluvial cover, offering very little surface clues to the mineralization at depth.  Fresnillo has seen mining for a long time, but the bigger discoveries have only been made in the last several decades thanks to modern exploration techniques and drilling technologies.

Many miners have left this district with empty pockets and dreams.  But the allure of massive Fresnillo-style veins always brings more.  And MAG Silver was fortunate enough to find one of those highly-sought-after sweet spots.

MAG’s geologists were indeed intrigued by results from prospecting work on the Juanicipio property.  But perhaps more intriguing was the fact that this project had seen very little modern exploration.  And this was surprising given its location only about 5km away from the headframe of the largest mine in the district.

Juanicipio’s maiden drilling program was wildly successful, with MAG Silver cutting significant mineralization in the very first holes.  Not surprisingly this success captured the attention of district bellwether and aforementioned headframe owner Fresnillo PLC (Industrias Peñoles at the time, which spun off its silver assets in 2008 to form Fresnillo PLC).  And it took advantage of its deep pockets and MAG’s limited working capital to gain operatorship and an option to earn a 56% majority interest in Juanicipio (which it eventually exercised).

Ongoing drilling by this newly-formed JV continued to encounter impressive mineralization.  And it eventually zeroed in on Juanicipio’s flagship Valdecañas vein.  To date Valdecañas, which was recently found to be two overlapping veins, has been traced over 1.6km+ of strike.  Its width averages more than 4 meters, with the bulk of it residing about 400m to 800m below the surface.  And per the latest resource estimate, the main zone contains 208m ounces that grade over 600 g/t.

Valdecañas is one of the world’s most important silver discoveries of the century, and one of the finest ever in the Fresnillo district.  And per the latest economic assessment, it’ll be very profitable to mine.

The mine will be built as an underground ramp-access operation.  Valdecañas’ ore will be extracted via long-hole retreat stoping methods.  And it’ll feed a flotation mill that will produce silver-rich lead and zinc concentrates.  These concentrates will yield an average of 10m ounces annually over a nearly 15-year mining life, including 14m ounces per year over the first 6 years thanks to higher grades.  Though MAG Silver’s take is only 44%, its respective 4.5m- and 6.3m-ounce streams will still make it one of the world’s largest primary silver producers.

And it is the economics that really drive this project home.  The price tag is estimated at only $300m, which is very reasonable for a large-scale underground mine.  And with life-of-mine all-in sustaining costs projected at only $6.61/ounce, Juanicipio comes with a 33% after-tax internal rate of return and a capital payback period of less than 4 years (at $18 silver).

This latest study was all Fresnillo PLC needed to confidently proceed with development.  And if Fresnillo is confident, MAG Silver ought to be as well.  Fresnillo, the world’s largest primary silver producer, operates three nearby mines that extract from similar ore bodies.  And provocatively its brand-new mine on the adjacent property is tapping a vein that appears to be Valdecañas’ southeastern extension.  Fresnillo knows exactly how to build and operate silver mines in this district.

Following final engineering and permitting, the JV broke ground in 2013.  It ended up cutting Juanicipio’s portal before the year was out.  And it is currently in the process of driving the access decline into the orebody.  At a planned advancement rate of 115m per month, it’ll take about three years to develop this decline.  The JV will construct the mill in the latter portion of decline development.  And it targets the commencement of stope development in early 2017.

If all goes as planned, Juanicipio will ramp up to commercial production in the first half of 2018.  And it’ll be a cash cow for its operators, even at lower silver prices.

With $86m in cash as of its latest filing, MAG Silver already has a big chunk of its portion of development capex covered.  So really it can just sit back and enjoy the ride with no immediate pressure to hit up the markets for more capital.  It can be selective in how it chooses to raise the last portion of its obligations.  And it is able to fund exploration at some of its other wholly-owned projects in search of its second mine.

MAG Silver has a really bright future as an emerging Mexican silver producer.  And ever since the Valdecañas discovery, its stock has been an investor favorite.  Like all precious-metals mining stocks MAG Silver has had a rough last few years amidst silver’s cyclical bear market, but it’s been resilient.  And MVG has shown some strength of late as it awaits silver’s imminent major breakout.

This 4+ year chart shows how MVG (in blue) scrubs up against its primary driver silver (in red).  And not surprisingly, this chart is pretty ugly.  Silver has had a rough ride since its 2011 bull high.  And naturally the mining stocks have followed their underlying metal lower.  There are some positives to take out of this chart though.  And this should excite investors who plan on riding MAG Silver in the long-overdue mean reversion higher.

Whether bull or bear, one thing I always like to look at is how a stock performs relative to material movements in the metal.  On the downside it will naturally follow the metal lower.  And in the case of risky mining stocks, it’s no surprise that they can leverage to the downside.  But this leverage should also be apparent on the upside, or else mining stocks wouldn’t be worth owning.  Fortunately MAG Silver fits the bill.

Since 2011 silver has had five meaningful uplegs.  And as you can see MVG has performed well in each, with tight average gains of an impressive 62%.  On the leverage front it’s a mixed bag though, with the first three uplegs in 2012 and 2013 delivering less than 2.0x positive leverage.  Now MVG’s leverage in each of these is still good at 1.8x, 1.9x, and 1.6x, but certainly not spectacular.

What is spectacular though is MVG’s leverage to gold, silver’s primary driver.  Using gold’s 15%, 15%, and 18% gains over the same periods of time, MVG positively leverages 4.2x, 4.1x, and 2.9x respectively.  Ultimately MVG’s silver leverage was diluted by the white metal’s excellent leverage to gold over these uplegs, which wasn’t the case in the two most recent ones.

In uplegs #4 and #5 silver didn’t positively leverage gold.  This didn’t stop MVG from continuing to deliver stellar positive leverage though.  Its 5.4x and 2.7x leverage showed incredible strength, signifying investors’ willingness to aggressively buy this stock upon any meaningful silver ascent.

Also a great sign of strength is the uptrend MVG has carved out over the last couple years, which is in defiance of silver’s downtrend over this same period of time.  And interestingly these trends have actually made silver the underperformer since 2011.  From its high to this week, MVG is only down 51% to silver’s 66% loss.  This trend is a true anomaly that ought to be a harbinger of great things to come for MAG Silver.

Overall MAG Silver is one of a handful of elite silver stocks that will lead the way in silver’s next upleg.  It is also one of the 12 stocks profiled in our latest research report, the product of 3 months of deep research into the universe of silver stocks trading in the US and Canada.

Our favorites range from small juniors to some of the world’s largest producers, all of which have the common goal of leveraging silver higher.  These companies own some of the world’s finest silver assets.  And in general they are well-positioned financially, managerially, and geopolitically.  Buy your report today in order to get the detailed fundamental profiles of MAG Silver and 11 other high-potential silver stocks!

Knowing which stocks to buy is of course only one piece of the greater financial-market puzzle.  And it won’t do much good if you don’t have a grasp of the bigger picture.  At Zeal we publish acclaimed weekly and monthly newsletters that color this picture from a contrarian perspective.  We draw on our decades of experience, wisdom, and knowledge to explain what’s going on in the markets, why, and how to trade them.  And right now you can get subscriptions to our newsletters at major discounts to their regular prices.  Our Contrarian Extinction Sale is a limited-time event, so take advantage of it today!

The bottom line is MAG Silver is an emerging Mexican silver producer.  Its world-class Juanicipio project is currently in the development phase.  And once in full commercial production, targeted for 2018, it will rank as the world’s sixth-largest primary silver mine.  Even a 44% minority interest will make MAG a major silver producer.

MAG Silver is sitting pretty, remaining well-funded to cover its share of early development.  And it has a reliable partner that knows exactly how to profitably mine silver in the prolific Fresnillo district.  Based on its performance amidst silver’s downturn, investors consider this stock an industry elite.  And when silver finally regains its bullish form, MVG ought to be one of the top performers.

By Scott Wright

So how can you profit from this information? We publish an acclaimed monthly newsletter, Zeal Intelligence , that details exactly what we are doing in terms of actual stock and options trading based on all the lessons we have learned in our market research as well as provides in-depth market analysis and commentary. Please consider joining us each month at … www.zealllc.com/subscribe.htm

Thoughts, comments, or flames? Fire away at scottq@zealllc.com . Depending on the volume of feedback I may not have time to respond personally, but I will read all messages. Thanks!

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