Mexico Mike

MAG Silver Corp is on the trail for big discoveries in Mexico

MAG Silver Corp was launched in 2003 to seize the opportunity for mineral exploration in Mexico at a time when the sector was just beginning to recover from a prolonged bear market. The management team believed that productive geologic trends, which generated the formation of some of the largest mineral deposits in the country, might actually extend much further beyond the established districts.  The corporate strategy is to acquire large blocks of property holdings that had been previously overlooked, in close proximity and along trend to proven mining districts. MAG then applies a regional exploration model towards the discovery of significant new silver deposits.

Much of the credit for this strategy can be attributed to a director of the company, Dr. Peter Megaw, who currently serves as exploration advisor. Megaw has been active in Mexico since the 1980s and his knowledge of the geology of the country enabled him to assemble the property holdings for seven separate projects. They are all located proximal to historic silver producing districts within the Sierra Madre Mineral Belt in north central Mexico, and MAG has already delivered some notable results on several of these projects.

Unlike most of the other mineral exploration plays, MAG goes about its plan with a degree of competence and professionalism that indicates the company means business. There is an absence of the hyperactive style of promotion that is so characteristic of the sector as a whole. The company does an exceptional job of managing its financial resources, and a large portion of the annual expenditure goes right into directly funding exploration. For investors, that is the degree of focus that is necessary in order to actually achieve success in this inherently risky sector.

If a company that aspires to control property in a prolific silver-producing district, there are few better places to start than the State of Zacatecas, where historic production is estimated at more than 3 billion ounces of silver. Mexican mining giant Industrias Penoles is the operator of the Fresnillo Mine, the largest primary silver producer in the world.  In this famous district MAG has acquired the property rights to the Juanicipio Project, immediately adjacent to the mine and along the axis of favourable geology known as the Fresnillo Trend.

In 2004 the company completed a drilling program that intercepted significant high-grading silver mineralization. Presented with this evidence that precious metals veining continued just beyond the limits of the Fresnillo Mine, Penoles agreed to a joint venture program with MAG shortly thereafter. The terms of this partnership require Penoles to fund US $5 Million in exploration to earn a 56 percent interest in the project, and also to purchase a direct equity stake in MAG. The deal ensures that the funding is in place to more thoroughly explore Juanicipio, with the expertise of the personnel that are intimately familiar with the regional geology.  Penoles is also the ideal partner to advance development of the new discovery, as the operator of numerous productive mines throughout Mexico and nearby smelting facilities.

A subsequent drill program earlier this year to follow up on the initial success at Juanicipio resulted in the discovery of a 6.35 meter interval averaging 1,798 grams per tonne silver and 2.91 grams per tonne gold. Additional drilling commenced in May and the results are pending as the program continues into the fall.

The magnitude of the success at Juanicipio amounts to a validation of the corporate strategy employed by the company.  The relationship with JV partner Penoles is strong, and it certainly appears that this alliance will lead to a development decision.

The company also controls a 100 percent interest in projects further along the Fresnillo Trend on either side of Jaunicipio. The Lagartos NW and Lagartos SE projects, with a combined area of 13,500 square kilometers, could also prove to be productive extensions of the same geologic district.

In the State of Chihuahua, MAG owns a 100% interest in another very promising project, at the Don Fippi property. Located within the Batopilas silver district, a region that is estimated to have produced between 200-300 million ounces of silver during several hundred years of active mining, the deposits in this region are characterized by extremely high grades of silver that is frequently localized within very narrow vein systems. Thus while the resource of any such discovery would be significant, the exploration work to uncover new veins requires a greater degree of precision. However, working within this challenging environment, MAG geologists were able to deliver exciting results from a drilling program earlier this year, and one discovery hole yielded an astonishing bonanza intercept of 2,385 grams of silver per tonne over an interval of 1.70 meters. The company will certainly follow up with additional work to try and increase the discovery area, and once again the strength of the results to date are an indication that the exploration strategy is sound.

Elsewhere in Chihuahua, MAG has been active exploring its Guigui Project, a group of claims immediately to the south of the famous Santa Eulalia Mining District that has produced an estimated 450 million ounces of silver.

Rounding out the suite of properties, are the Cinco de Mayo and the Adargas Projects in Chihuahua, along with the Sierra Ramirez in Durango State, target mineralization known as carbonate replacement deposits, which can amount to a large tonnage of very rich, continuous ore and are therefore economically attractive. MAG has achieved some encouraging results to uncover mineral occurrences and define targets but these district-scale projects remain grossly under-explored.

While any one of the seven ongoing projects could generate a significant discovery, just considering the potential for its flagship Juanicipio Project suggests to me that the company is undervalued. In what could amount to a large new deposit at the premier silver mine in world, MAG’s carried interest in the project represents an enormous asset value for the company. Joint venture partner Penoles has certainly indicated that this potential is very real based on the priority it has placed to aggressively advance the exploration underway there. And if in fact the project advances all the way to production, Juanicipio could become a revenue generator for MAG that could underwrite the development of the other projects.

I am convinced that the best performing mining stocks in the years ahead will be those that are leveraged to large silver deposits. There is no better place in the world to explore for such discoveries than Mexico, and MAG Silver is without question one of the best-positioned juniors that is active in the country.

The performance of a junior mining company is positively influenced by news flow, and the greatest appreciation in market value for a project occurs at the discovery level. Considering that the capital structure of the company amounts to less than 44 million shares on a fully diluted basis, shareholders are highly leveraged to market gains that accrue as a result of the aggressive exploration underway.  The credentials of the management team, the enormous discovery potential of the projects controlled by the company, and the impressive string of exploration successes achieved to date, would all suggest that MAG will continue to be a strong market performer well into the future.

MAG is therefore a superb corporate vehicle that is positioned in the optimum phase of development with the numerous projects currently under exploration. In a resource bull market, I could not hope for a better investment option to capture share price appreciation.  I add $10,000 of MAG Silver shares to the Mexico Mike Portfolio.