Three Ways to Win with a World Class Ag Project: Clarus Securities Watchlist

 

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Posted by: Stockboard Updates
Date: 05.14.12
Sectors: Silver

Three Ways to Win with a World Class Ag Project  -
Monday, May 14, 2012

MAG Silver is an exploration stage company focused on its flagship Juanicipio JV silver project in the prolific Fresnillo district. MAG has a 44% interest in Juanicipio and Fresnillo Plc ($11B MC, FRES-LN) has a 56% interest.  Juanicipio is a world class silver discovery that boasts a resource of ~200MMoz and an average Ag grade of 620 g/t, in addition to gold, lead and zinc by-products (310MMoz Ag Eq.), putting it in the top ranks of global silver development projects. 

We believe that Juanicipio is highly strategic to Fresnillo’s future growth plans and therefore the most likely value creation scenario is a take-over bid. However, investors can also profit from the development of Juanicipio as a standalone project and through additional value creation in the very promising Cinco de Mayo project. In summary, we see three ways for investors to win with MAG: (1) Potential takeover by Fresnillo (2) Development of a robust stand-alone project (3) Promising secondary Cinco de Mayo project.

(1)M&A - Location, Location, Location  

Juanicipio lies within the world class Fresnillo Silver Trend in Zacatecas where 4B+oz Ag has been historically produced. The project sits in close proximity to Fresnillo’s existing mine infrastructure about 1km from its producing 8,000 tpd mill and a short drift from the San Carlos shaft. We believe that mill feed from Juanicipio is critical to Fresnillo achieving an expansion from the current 37 MMoz/year in companywide production to 65 MMoz/year by 2018. 

(2)Extremely Robust Stand-Alone Project – Upcoming PEA  

Revised PEA to be based on stand-alone mining operation and resources of ~200 MMoz Ag. At Clarus metals prices and an estimated capex of $350MM ($154MM attrib.), we calculate a NPV8% of $2.1B ($922M attrib.) and IRR of 69%, driven by cash costs of (-$3.80)/oz, net of by-products. We estimate ~$180 MM in annual attributable cash flow to MAG. Strong project economics are driven by very well developed infrastructure with power, paved roads and water all in place. We believe that the upcoming PEA could provide a yardstick with which to value Juanicipio and could be a catalyst for a take-over bid.

(3)Cinco de Mayo an Exciting Project in its Own Right (100% Interest)  

Drilling at the secondary Cinco de Mayo project in Chihuahua State in Northern Mexico has intersected between 200-1,100 g/t Ag with Zn and Pb values up to 20%. We believe that this project has potential to be a significant asset in its own right (detail Pg. 3).

Milestones/Catalysts

(1) 36,000 m drill program – Ongoing, (2) Updated PEA on Juanicipio  – Q2/12,

(3) PEA on Pozo Seco – Q3/12, (4) Resource Estimate at Jose Manto – Q3/12

EXPLORATION POTENTIAL REMAINS

We believe that significant exploration potential at Juanicipio remains with potential for extensions to known veins and discovery of additional veins on the land package. MAG has budgeted a 36,000m 8 rig exploration program for 2012 that will focus on key target areas with particular emphasis on: (1) extensions to Valdecañas and Juanicipio veins (2) the newly discovered Las Venadas vein (3) testing for new discoveries in the NW and SE of the land package and in Saucito West.

 

CINCO DE MAYO – NOT TO BE OVERLOOKED

MAG’s 100% owned Cinco de Mayo project is a carbonate replacement style deposit located along the Chihuahua trough, the NW trending regional structure which hosts several of the largest CRDs in Mexico.  The project is located about 200km north of the city of Chihuahua in northern Chihuahua State Mexico.  MAG has identified four zones of Ag-Pb-Zi mineralization at Cinco including: (i) Jose Manto (ii) Bridge Zone (iii) Cinco Ridge and (iv) La Gloria Skarn. Drilling has successfully defined high grade Ag-PB-Zi mineralization over a 4km strike length.

Best intercepts to date include:

•                      CM11-380: 0.8m at 1.35 g/t Au, 68 g/t Ag, 0.82% Pb and 4.71% Zn including 3.98m at 0.5 g/t Au, 386 g/t Ag, 8.2% Pb and 14.0% Zn with a high grade core of 0.86m at 0.23 g/t Au, 1,170 g/t Ag, 7.4% Pb and 12.0% Zn

•                      CM11-377: 5.25m at 0.22 g/t Au, 280 g/t Ag, 6.1% Pb and 6.2% Zn including 1.44m at 0.28 g/t Au, 878 g/t Ag, 18.9% Pb and 12.9% Zn

•                      CM12-390: 14.1 at 0.47 g/t Au, 161 g/t Ag, 3.2% Pb and 14.2% Zn including 1.63m at 0.5 g/t Au, 778 g/t Ag, 14.9% Pb and 18.2% Zn

In addition to Jose Manto-Bridge zone, drilling on the Company’s Pozo Seco depositin the western part of the Cinco permit area has defined a high grade Mo-Au resource of 29 Mt indicated grading 0.147% Mo (94 MM lbs. Mo) and 0.25 g/t Au (230k oz Au) and 23.4 Mt. inferred grading 0.103% Mo (53 MM lbs. Mo) and 0.17 g/t Au (129k oz Au).

To date, the Company has drilled over 128,000m on the property in more than 270 holes, and outlined high grade silver/lead/zinc mineralization along approximately 4,000 metres of strike length of the Jose Manto, as well as Pozo Seco. MAG plans to complete 15,000m of drilling with 3 rigs on Jose Manto-Bridge Zone and Pozo Seco in 2012. We also highlight that Jose Manto-Bridge zone will be the subject of an initial resource estimate in Q3/12 and that Pozo Seco will be the subject of a preliminary economic assessment by Q3/12.

EXPERIENCED MANAGEMENT TEAM AND BOARD OF DIRECTORS

Dan MacInnis brings over 30+ years of worldwide mineral exploration experience. He has managed and directed multi-million dollar exploration programs for Noranda Exploration, Battle Mountain Gold/Hemlo Gold, and Sargold Resources. On the ground, Peter Megaw brings 27+ years of exploration experience in Mexico. He has been instrumental in a number of mineral discoveries in Mexico including new ore bodies at Excellon Resources' Platosa Mine as well as discovering MAG Silver's Juanicipio, Cinco de Mayo, Batopilas and Santa Eulalia properties.

We also highlight the strength of the board of directors which has the experience to steer the Company through any M&A process or could take the project through to production. Jonathan Rubenstein has 20+ years’ experience in senior management and corporate development. As VP of Sutton Resources, he played a key role in negotiating the company’s $525 million takeover by Barrick Gold in 1999. Derek White has over 20 years of financial experience in the mining and metals industry. He has held financial management positions in both mine operations in South Africa, and metals trading in London. He has been the CFO of newly formed Quadra Mining, a mid-tier copper producer, since 2004.

 

THE WAR OF THE ROSES – HISTORY SUGGESTS THAT FRESNILLO WANTS JUANICIPIO

Dispute History

Fresnillo Plc attempted a hostile bid for MAG Silver in December 2008 while classified as an insider due to their 19.8% shareholding at that time, which meant that a formal valuation of MAG had to be prepared by an independent valuator prior to Fresnillo commencing its takeover bid. MAG appointed an independent valuator (TD Securities) and an independent technical consultant (Roscoe Postle and Associates). The independent valuation commenced in January 2009 and was suspended in February 2009 because Fresnillo refused to provide information considered critical to the completion of a reliable valuation.

In June 2009, the Ontario Securities Commission ordered Fresnillo to provide discovery of documents and email records that were needed to complete the independent valuation report for the non-Fresnillo shareholders of MAG. Fresnillo repeatedly stated that critical documents concerning Fresnillo's regional development plans adjacent to the Juanicipio JV property and other information required in connection with the independent valuation of MAG did not exist. Shortly thereafter, Fresnillo withdrew its intention to make a hostile bid, obviating the need to comply with the OSC order.

In order to clarify the takeover provision of the Shareholder Agreement, MAG initiated arbitration proceedings with the International Court of Arbitration of the International Chamber of Commerce (ICC) and sought a ruling as to whether or not Fresnillo could acquire control of MAG without the consent of its board. It was always MAG’s position that an unsolicited hostile bid by Fresnillo was prohibited by the terms of the Shareholders Agreement. 

An arbitration tribunal was established by the ICC in the proceedings against Fresnillo and on May 5, 2011 delivered a unanimous ruling in favour of MAG. The ICC upheld MAG's interpretation that Fresnillo’s unsolicited hostile takeover offer breached the standstill provision in the Shareholders Agreement and, in accordance with Mexican law, awarded MAG US$1.86MM in damages. The ruling by the ICC upholds the standstill provision and confirmed that MAG is protected from a further opportunistic or unsolicited take-over bid by Fresnillo. 

 

Expect Fresnillo to Continue Pursuing MAG

We believe that it is highly logical to expect Fresnillo to continue to pursue the consolidation of Juanicipio as an avenue for growth. We quote Fresnillo’s 2011 Annual Report: “Our flagship Fresnillo silver mine has been in near continuous operation for almost 500 years and is still the world’s single largest primary silver mine, producing 2.8% of global production in 2011. The challenge is to compensate for the trend of declining grades in current reserves by identifying new high grade areas and increasing the volume of ore processed, while profitably mining the plentiful, lower grade resources. To do so, we continue to explore in the mine’s area of influence and plan to expand milling capacity from 8,000 to 10,000 tpd in 2013-2014”. In summary, we think that these ounces are highly important to Fresnillo’s growth plans in the district and overall production profile

 

Investment risks facing the Company are typical of an international mining exploration and development company including but not limited to the following:

Commodity Price Risk – The greatest risk facing the Company is fluctuations in commodity prices.

Minority JV Interest – MAG Silver is not in control of development and production of the Juancipio JV project as Fresnillo plc is the operator.

Financing Risk – The Company faces financing risk. MAG Silver currently does not have a revenue stream and the Company is still dependent upon the financial markets to continue to expand its resource base and explore and further develop its projects.

Technical Risk – Typical risks associated with project development.

Geologic Risk – Although the Company has defined 43-101 compliant resources at its Juanicipio project, there is no certainty that the Company will be able to define additional resources at Juancipio or Cinco de Mayo or ultimately convert resource ounces to mineable ounces within the Company’s reserve profile.

Political Risk – The Company faces low political risk in Mexico with an established mining history and development continuing to ramp up in the country.

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Equity Research Ratings

Buy: Attractively valued and expected to appreciate significantly from the current price over the next 12-18 months.

Speculative Buy: Expected to appreciate significantly from the current price over the next 12-18 months. Financial and/or operational risk is high in the analyst’s view. Accumulate: Attractively valued, but given the current market price, is expected to appreciate moderately over the next 12 -18 months. Hold: Fairly valued and expected to trade in line with the current price over the next 12-18 months. Sell: Overvalued and expected to decline from the current price over the next 12-18 months.  Under review: Pending additional review and/or information. No rating presently assigned. A summary of our research ratings distribution can be found on our website. 

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