MAG Silver: Clues in the Concrete
Issue 124, April 2015
Does the sheer volume of concrete being poured into the Juanicipio silver project in Mexico suggest that MAG Silver will be bought by silver giant Fresnillo? That, at least, is the view of some investors.
MAG and Fresnillo are jointly developing Juancipio, sinking $350m and a 2.5km tunnel into its 605m-ounce resource, widely considered the largest and highest grade silver deposit not yet in production. The ramp's concrete lining has got silver mine spotters excited. “It's a very nice ramp!” one analyst says, calling it “fabulous” and “world class.”
“It's a Fresnillo standard,” one source explains, describing it as a simple trade-off between capital and operating costs. “It's probably over-designed and it's certainly not cheap to do, but it positively impacts on wear-and-tear on vehicle tyres and just saves on maintenance costs down the road.”
Thanks to Fresnillo's heavy presence in Mexico, the tunnel is actually costing the companies less than those sunk by peers. MAG and Fresnillo are spending around $1,500 per metre, versus tunnelling costs for Toronto-listed SilverCrest at its nearby Santa Elena mine closer to $2,000 per metre.
Sources say however that the ramp's quality suggests Fresnillo is planning for a considerably longer mine life than current guidance of 14 years. Recent drill results point to a bonanza-grade silver “upwelling zone” at the foot of the main vein, whilst Juanicipio sits on an extension to Fresnillo's Saucito mine. “They're building this as a 30-year operation,” one source says.
Work on the tunnel also appears to be accelerating. Output of 10m to 15m ounces is expected from 2018, but in September, Global Mining Observer asked whether Fresnillo was quietly planning to accelerate the project to prop-up its own output targets. “I’m not aware of any plans to accelerate development,” MAG said. “It depends on the rate of progress in the rock that we’re entering now.”
The tunnel's sink rate has since been increased to 100m per month. This week, a spokesman for MAG said he could not comment on current progress, because the information is not public, but according to one source, Fresnillo is getting through one drill-and-blast cycle per day, suggesting progress of 120m per month, well ahead of even the accelerated rate.
Raymond James analyst David Sadowski has a C$15.00 price target on the stock, versus MAG's current share price of C$8.47, but cautions against trying to second-guess Fresnillo and its controlling shareholders, the Baillères family.
“Juanicipio's probably the best undeveloped asset they have,” he says, “and it wouldn't surprise anyone to see them come in and buyout MAG, but Fresnillo essentially is family run. They do things in their own specific way and sometimes you can see things that aren't really there.”
CORRECTION: The original version of this article stated tunnelling costs of $15,000 per metre, corrected in paragraph four.
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