Investors seeking
exposure to silver have limited options.
A handful of producing primary silver companies are available to choose
from, and by current valuation standards they are expensive to own. Alternately, one may buy into the relatively
bargain priced junior exploration companies with the expectation of a major new
discovery that will be developed into a mine, and reward shareholders with
rapid appreciation. I believe that MAG
Silver provides an excellent opportunity to participate in the early stages of
a silver bull market, while maintaining a low risk approach. I own shares in MAG Silver.
Overview:
MAG Silver is
approaching its first anniversary as a public corporation, having started
trading on the TSX-Venture exchange on April 22, 2003. Engaged in the pursuit of large precious
metals deposits, the team at MAG has managed to assemble an excellent package
of prospective properties from which earlier exploration efforts have indicated
the potential for major discoveries.
During the long bear market in silver, many past exploration companies
disappeared and the declining interest resulted in some claims to premier
silver mining properties having lapsed or expired. Through a long-term active presence in Mexico, Dr. Peter Megaw
was able to capitalize on this opportunity and secure the rights to these
districts, providing MAG with a head start to build their base of
prospects. Ongoing property acquisition
and expanding of properties through staking of additional claims has resulted
in MAG controlling a suite of 7 properties in some of the best silver districts
in Mexico. Working with the experienced
management team of President and CEO George Young and CFO Frank Hallam, Megaw
is contributing years of fieldwork and in-depth knowledge in mineralization
trends to rapidly advance the exploration of the properties towards new
discoveries.
The company is well
funded with over $4 million dollars in working capital and no debt
obligations. A further $3 million will
be added to the treasury with the exercise of all 1 million options and 3.3
million warrants, in a share structure of only 28 million shares fully diluted.
The Properties:
Mag Silver is the
largest mineral rights holder in the district surrounding the Fresnillo Mine,
host to over a billion ounces of silver.
The structural trend that produced this massive deposit has been traced
through MAG’s Jaunicipio property, and additional claims were staked along the
trend to the Northwest forming the Lagartos property. Drill core analysis has validated the acquisition of the
properties, revealing similar mineralization and alteration as with the
Fresnillo district. Past drilling
success on this property has yielded intersections of up to 730 g/t Ag and 10.9
g/t Au. Additional drilling is planned
for both the Jaunicipio and Lagartos properties, commencing in June 2004.
Like the Jaunicipio
Property, the Guigui Silver project is adjacent to large producing silver
properties with historic production of over 450 million ounces of silver, the
Santa Eulalia District. Analysis of
geological structure, and gravity and magnetic surveying of the property have
indicated that the source zone of the high-grade silver mineralization could
lie within the property controlled by MAG.
Based on this data they staked an additional 440 hectares of surrounding
property, and selected target areas for a 6-hole drill campaign. Drilling of 4,500m has been completed but
the assay results are still pending as of the date this review was being
prepared.
The Don Fippi property
was assembled through the patient acquisition of numerous small claims and
concessions, and now constitutes the majority of the Batopilas District in
Chihuahua. This intriguing and complex
property has not seen modern exploration activity, yet was mined for
approximately 300 years and produced an estimated 300 million ounces of
silver. The silver is concentrated in
narrow extremely high-grade veins averaging 2% silver content and ranging as
high as 75% native silver. The
difficulty in locating such deposits is offset by the high reward nature such a
discovery represents. Part of the
challenge in targeting these zones of high-grade silver is the unsafe condition
of the historic mine workings on the property.
A great deal of work remains to be done to stabilize the underground
workings and map out the extent of the operations. Previous mining operations exploited ore reserves on a “stope
and hope” basis, and large sections of the property have no evidence of any
mining activity at all. Through ongoing
analysis of the area the objective is to have drilling targets in place both
underground and at surface by the fall of 2004 for a program to locate
additional high-grade silver zones, which are believed to exist.
The nearby Adargas
Property in Chihuahua is also well situated near two high-grade silver trends,
and includes the workings of the historic San Pascual Mine. It is believed that other high-grade silver
zones will be discovered along the margins of rhyolite dykes that occur
locally. A drilling program was
scheduled to commence on March 10, 2004.
Given that this same formation system hosts the largest silver-lead-zinc
mine in Mexico at the nearby Naica deposit, the Adargas property in itself
could become a company-maker and success in this drilling program could lead to
a major increase in the value of this company.
The Cinco de Mayo
Property targets a carbonate replacement deposit in Chihuahua. Previous exploration work has revealed that
the property hosts similar geologic features with many of the most productive
CRD in Mexico. Limited past production
has occurred on the property. Because
the mineralization occurs at several hundred meters depth, MAG has initiated a
detailed survey and mapping program to select targets for a drilling program in
the second or third quarter of 2004.
The Sierra de Ramirez
is another CRD, located in Durango State.
Like the Don Fippi property, the Seirra de Ramirez has been assembled
from a collection of many smaller holdings and has not seen thorough
exploration activity. This property is
another wise acquisition, given its proximity to other producing districts,
excellent infrastructure, and potential for exploration success. Work is in progress to outline the most
favorable drilling locations, through detailed geochemical and geophysical
surveying.
Outlook:
MAG Silver has all of
the ingredients that are necessary to be successful as a junior exploration
company. The management team is
experienced and has developed a strong working knowledge for many years on the
properties controlled by the company, and understanding the geological
structures of the region. They have
leveraged this experience to acquire a suite of properties that offer excellent
potential to host major precious metals deposits, on favorable terms. The company remains well funded to carry out
an aggressive exploration program simultaneously on several properties,
improving the odds that a major new discovery will create shareholder
value.
Mexico remains the
premier silver-producing region of the world, and as the fundamentals continue
to improve in the world silver market, more activity will be focused towards
acquiring and exploring prospective properties. MAG Silver has locked up control of some of the best property
packages in the country while it was possible to do so cheaply, and this all
but guarantees that the company will be a driving force in silver exploration
for years to come.
The markets currently
value junior silver companies at less than $1 per ounce of silver
resource. With a current market
capitalization in the neighborhood of $50 million this implies an estimated
resource of between 50-60 million ounces of silver. MAGs properties are at the early to mid-stage of the development
cycle, and do not have enough drill core data to support reliable estimates for
resource content. Much of the work done
so far has been to identify structural trends that are similar to known large
silver deposits in the region, and a great deal of follow-up work must be done
to conceptualize the size of any deposits from the early success in the
field. It is appropriate to assign a
premium market cap to the company in consideration of the higher probability that
MAG will be able to advance at least one property to the production stage with
several hundred million ounces of silver content. In fact any one of the seven properties currently controlled by
the company could be considered a flagship property for a junior explorer. It is unlikely in the current atmosphere of
renewed interest in precious metals that a new company will be able to assemble
a suite of property comparable to the holdings of MAG Silver.
The purpose of this
summary was not to speculate on the potential pricing for silver on the world
commodity markets, but one cannot undertake an analysis of a silver explorer
without taking into account the long-term outlook of the metal itself. Given the extreme supply/demand imbalance
that has persisted in the world silver market for several years, it is
projected that silver is in the early stages of a long secular bull market that
could see the price of the metal increase several hundred percent. If such a price escalation occurs, it is
likely that the investment interest directed towards the junior silver
exploration companies would also intensify.
MAG Silver can appreciate as an investment then on the basis of the
possibility of a major new discovery adding enormous value through the
increased resource controlled by the company, or on the basis of a investment
climate where investors are willing to pay a higher multiple to own silver
companies, or on the potential that the high quality property base will
eventually make the company a takeover target.
It is possible that
the current round of drilling at Guigui, Juanicipio and Adargas will intersect
zones of high-grade silver mineralization and with further exploration prove to
be deposits in excess of several hundred million ounces. To have three projects of this caliber on
the go simultaneously affords investors a lower risk opportunity to such a
discovery that could double the share price or more. Later in the year drilling will begin on the Don Fippi
project. If the company were to be
successful intersecting just one zone bearing thousands of grams per ton of
silver, the potential increase in share price from this discovery alone would
probably justify investment in MAG Silver.
While it is difficult to assign a target price on the speculation of a
discovery, it is reasonable to assume that the company will continue to
progress on their exploration efforts and achieve some success that will be
reflected in a rising share valuation and quite possible that MAG will trade
above $4 per share in 2004.
Disclaimer: I have made my research and opinions available to the public as a resource to provide investors and the public with basic information. My comments and opinions should not be interpreted as a recommendation or investment advice, which I am not qualified to provide. While I have made every effort to maintain accuracy in the information I provide, it is possible that there are some errors or omissions in my coverage and the accuracy cannot be guaranteed. It remains the responsibility of each individual investor to confirm if the subject of my analysis is appropriate for their investment objectives, and to conduct their own research and due diligence, and retain the services of a qualified advisor on to provide this service on their behalf. I accept no responsibility for the performance of the companies that I feature in my coverage. Junior mining and exploration companies are a risky market sector and investment in these companies can result in loss of capital. Past performance is no guarantee of future success. From time to time I may purchase stocks in the companies I feature in my reports, and I may sell some or all of my holdings. I will disclose personal ownership in those companies that I refer to at the time of my first coverage, or after follow up reports. I do not accept compensation from companies as payment to provide positive coverage or opinions