Projected Silver

MAG Silver And Its Projected Cash Flows From Mining Operations (NYSEMKT:MAG)

MAG Silver’s (MAG) Juanicipio Project is scheduled to begin underground production this month (July). MAG Silver has a joint venture with Fresnillo (OTCPK:FNLPF) and owns 44 percent of the project, while Fresnillo owns 56 percent. The Juanicipio project has been touted as one of the highest-grade silver projects in the world of size. If that…

MAG Silver’s (MAG) Juanicipio Project is scheduled to begin underground production this month (July). MAG Silver has a joint venture with Fresnillo (OTCPK:FNLPF) and owns 44 percent of the project, while Fresnillo owns 56 percent. The Juanicipio project has been touted as one of the highest-grade silver projects in the world of size. If that is the case, I want to understand its cash flow potential as it becomes operational and production ramps up.

Note: As I was going through MAG’s financial statements, I had additional questions and reached out to MAG for comment on these questions. They were kind enough to respond very quickly, so if you see something in this article and you are wondering where the information came from, that may be why.

MAG Silver is not set to begin operating its own 4,000 ton/day plant until mid-2021. That’s almost a year from now. However, MAG Silver has said that it will start processing mineralized material from Juanicipio through the Fresnillo Mill beginning in Q3 2020.

It’s important not to confuse this with mid-2021, when the company will be operating its own 4,000 ton/day plant. Between now and then, it is merely going to be running mineralized material through Fresnillo’s third-party plant two days out of each month. This will primarily benefit MAG Silver by helping the company understand how the material performs before it begins running it through its own plant in mid-2021. MAG is not looking to this to provide operating cash flow to supply capital needs, however, some cash flow will be generated for the joint venture, and this will offset some of the required capital to complete the build.

The company did a capital raise via Eric Sprott as of April 30, 2020, which raised almost USD $43 million that should meet capital and operational needs between now and mid-2021, when the 4,000 tpd plant is operational. Therefore, again I will say it is not reliant on production from the third-party Fresnillo plant to provide any sort of cash flow to meet capital needs.

Economic Model

I’ve built an economic model that tries to predict cash flow for MAG Silver from mid-2021 and beyond based on various silver prices. I’m not concerned with predicting cash flow between now and mid-2021, as it will not be material based on my research.


Disclaimer: Any assumption found here that isn’t found in MAG’s financial statements, I have made myself.

First, MAG’s partner Fresnillo has stated that they plan to be at 85% capacity by Q4 2021. To model this, I assumed a smooth ramp-up period to December 31, 2021, starting at 100 tons per day and increasing 1.98% until it reaches 85% capacity (3,400 TPD) on December 31, 2021.

Regarding the all-in-sustaining-costs (AISC), MAG projects $5.02 per ounce of silver when running at 100% of capacity, so I’ve estimated AISC will run at $9 per ounce at 85% capacity. I’ve projected a smooth ramp-up starting at $35 AISC per ounce and moving towards $9 per ounce. There will be a certain level of fixed costs, which causes AISC to be higher at first, but as they ramp up production, I’m assuming the AISC will come more in line with expectations.

Next, MAG’s partner Fresnillo estimates that sometime in 2022, they will reach 95% (3,800 tons/day) of the 4,000 ton/day capacity. To be conservative, I’ve estimated this will happen at the end of Q4 2022. Therefore, the model projects they will run at 85% capacity throughout the second half of 2021 and all of 2022.

I like to stay on the conservative side when making projections. I’ve worked in the mining industry first-hand and know that machines break, mistakes are made, and things rarely go as perfectly as you plan or expect that they will.

MAG estimates that when it is running at 4,000 tpd nameplate capacity, its AISC per ounce of silver mined will be $5.02 per ounce. If the company can reach this, it would be incredible, but to remain conservative, I’m projecting $7 per ounce at 95% capacity and, as I’ve already said, $9 per ounce at 85% capacity. As I run a silver price sensitivity analysis, I’m projecting AISC to increase 12% for each $5 increase in the silver price. This is primarily due to other variable costs rising, such as fuel and electricity.

Also, regarding the amount of silver mined, MAG Silver has estimated that for every ton of raw material it runs through its plant, the company will, on average, get 550 grams of silver per ton, which equates to 19.4 ounces of silver per ton. In addition, it anticipates retrieving gold from the raw material as well, in the amount of .07 ounces per ton. For simplicity, I’ve converted gold to silver ounces in my projections using an 80-to-1 gold-to-silver ratio even though the current gold to silver ratio is closer to 100. When adding gold ounces per ton to the silver ounces, I calculate total silver ounces per ton of about 24.8 ounces per ton.

The above numbers come from mining in the Bonanza Zone, which is the highest grade. I assumed that during my 10-year cash flow projections, they would mine from the Bonanza Zone for the entire ten years. Their quarterly presentation states that the 2017 PEA states that the mine plan has a 19-year life of mine.

Cash Flow Results

Source: Created by myself using assumptions and data from MAG’s financial statements

Source: Created by myself using assumptions and data from MAG’s financial statements

The Joint Venture Model

As was already stated, MAG Silver has a 44% interest in the Juanicipio Project. It has entered a joint venture partnership with Fresnillo, which trades on the OTC market but is listed on the London Stock exchange. Fresnillo, although listed in London, is headquartered in Mexico City, Mexico, and has only existed since 2008, when it was spun off from Industrias Penoles. However, Industrias Penoles was founded in 1887 and is the oldest mining company in Mexico, so Fresnillo, by extension, has been around a long time.

I believe the joint venture model is an attractive business model when operating in a foreign country such as Mexico. Mexico has recently shown that it is clamping down on foreign entities, and it likely won’t get to the extremes of nationalization. However, the fact that it is operating in partnership with a Mexican entity such as Fresnillo gives me comfort that MAG Silver’s relationship with the Mexican governmental organizations will go well. That hasn’t been the case with some other silver producers.

Conclusion/Price Estimates

MAG Silver will begin testing its raw material in the Fresnillo-owned beneficiation plant this month. This will help MAG Silver to understand how the material “behaves” during processing so that when its 4,000 tpd plant comes on-line in mid-2021, the company can more quickly fine-tune its plant to handle the material and maximize efficiency.

The Juanicipio Project that the company is currently focusing on appears to be a world-class resource. I’ve taken variables that are given from MAG’s MD&A and Financial Statements and tried to estimate its future cash flows at various silver prices. I’ve made my own conservative assumptions along the way where necessary.

It seems that other silver mining companies currently trade at or around ten times operating cash flows. Based on that, I’ve simply multiplied the cash flow projections in the year 2023 (the year when full operating capacity is reached) to reflect where prices might trade at different silver prices in the future. If silver prices rise swiftly, I’d expect MAG share prices to probably move in a more parabolic nature and likely overshoot these price targets at different times. Still, generally speaking, this is what one might expect from MAG share price if silver prices increase.

Source: Created by myself using assumptions and data from MAG’s financial statements

As one can see, if a person is willing to wait until MAG reaches full production, and silver prices appreciate, MAG’s stock should generate attractive returns from today’s price. I would also expect MAG stock to “re-rate” as it goes from the development stage into the production stage if silver prices remain stable where they are today.

To calculate these share prices, I used an estimated 90,000,000 shares outstanding to include the private placement from Eric Sprott.

For reference, these projections seem to be in line with many of the Wall Street analysts’ projections, as seen below. My conclusion is that for a patient and diversified investor that expects a rising silver price environment, MAG is a buy at this level. However, if the market draws down swiftly again as it did in March, there may be better opportunities to buy.


The primary method of calculating cash flows was to use estimated production and multiply that by a range of silver prices and then subtract a projected and conservative AISC number. This calculation is not how operating cash flows or free cash flow is calculated on the cash flow statement. Instead, a more accurate description would be cash flows from mine operations.

To see the economic model that I used, click the link below, and it will display my work in spreadsheet form. If you think an error was made, please share it with me, and I will be happy to update it.

MAG Silver Projected Cash Flows From Mine Operations – Spreadsheet

Disclosure: I am/we are long MAG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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