equity research

EQUITY RESEARCH
ESTIMATE CHANGES
RECOMMENDATION BUY
MAG SILVER CORP. JUNE 25, 2015
12-MONTH TARGET $12.05
TSX: MAG $10.07
Updated Guidance on the Back of Technical Review of "Valdecanas
Vein Deep"
Salman Partners attended MAG Silver’s analyst meeting in Vancouver, British Columbia
on June 24 to review the technical implications associated with recent drill results at
Juanicipio. The meeting centered on the extension of high-grade mineralization at depth
within the Valdecanas Vein and the implications surrounding the now evolving deposit
model.
Kevin MacKenzie, P.Geo, MBA
Investment Analyst
604-622-5583
kmackenzie@salmanpartners.com
Dennis Lo, MBA
Research Associate
604-622-5298
dlo@salmanpartners.com
Key Takeaways from Technical Review
Drill results indicate the potential for two overlapping vein systems. Evidence for
this interpretation is derived from the increasing concentration of chalcopyrite at depth,
overprinted by late stage high-grade precious metals bearing veins. As per Buchanan's
Epithermal Vein Model, the increasing copper grades at depth are in line with the
overall metal zoning seen to date; however, the high-grade precious metals overprint at
depth is anomalous and may represent the top of a separate vein system. Management
hypothesizes that this is the product of a downward shift in the boiling level, and cites
variable boiling level elevations within the Fresnillo District as supporting evidence.
Extrapolating the geological interpretation, management speculates on Mine #2. Given
the depth of the projected secondary vein system, management has commissioned a study
to evaluate the potential installation of a shaft to service Mine #2. Management notes
that Mine #1 will proceed as per the design outline in the 2012 preliminary economic
assessment.
52-Week Range
$6.56 - $11.42
Shares O/S (M)
69.2
Shares FD (M)
73.1
Market Cap (M)
$696.6
Cash (US$ M)
$86.3
Working Capital (M)
$83.5
Working Capital (US$ M)
$87.0
Debt (M)
$0.0
NAVPS
$12.05
Silver Reserves (P&P, M ozs)
0.0
Silver Resources (P&P&M&I, M ozs)
165.9
Silver Resources (all categories, M ozs)
226.9
Valuation
Our current valuation of MAG Silver accounts for a 25% increase in the overall 2014
Juanicipio mineral resource estimate. This, based on a US$1.00/AgEq oz multiple,
translates to an in-situ exploration credit of US$42.2 million. Based on our back-of-theenvelope analysis of the recent drill results, we derive an associated NAV value of US$28-35
million. This is based on an in-situ contained metals calculation of 6Mt with averaged/
diluted grades across P1 to P4 mineral intercepts (includes 0.5-0.6X exploration multiple).
Although our applied exploration credit of US$42.2 million covers the ascribed value of the
recent Valdecanas drill results, we do recognize that we are rapidly exhausting said credit,
while discounting future exploration upside. To adjust for this, we have amended our
exploration credit to reflect a weighted average increase in resource tonnage. We feel that
this more accurately reflects the evolving narrative behind a potential stacked epithermal
system, while tempering our overall exploration expectations.
Two-Year Share Price History
MAG Silver Corp.
TSX (S&P) COMPOSITE INDEX (SPTSX)
$12
$11
$10
$9
$8
$7
$6
$5
$4
JUN-13
FEB-14
OCT-14
Vol (mil.)
JUN-15
7
6
5
4
3
2
1
0
Recommendation
With adjustments made to our applied Juanicipio exploration credit (US$46.6 million from
US$42.2 million), in addition to Salman Partners' revised 2015 FX and commodity price
forecasts, our target price for MAG Silver increases to $12.05 per share (previously $11.50
per share). We maintain our BUY recommendation.
All figures are in Cdn$ unless otherwise noted
Disclaimer Note: In accordance with NASD Rule 2711 and IIROC Rule 3400, Salman Partners Inc. refers the reader to the end
of our research report for our firm’s specific disclosures, policies and procedures in respect of research analysts and research
reports. This report is distributed in the U.S. by Salman Partners (USA) Inc. and was prepared by its Canadian Broker Dealer
affiliate, Salman Partners Inc. Please refer to the end of this report for the disclosure statements, including the Analyst’s
Certification. Analysts employed by non-U.S. affiliates are not registered pursuant to NASD rules.
MAG SILVER CORP.
MATERIALS
REVIEW OF DRILL RESULTS
Excerpt from Salman Partners April 24th Metals Morning Note:
“MAG Silver announced the results of a targeted drill program at the company’s 44% owned
Juanicipio project, located in Mexico’s Fresnillo mining district. The results, highlighted below,
were from four drill holes which targeted an extension of the Valdecanas Vein at depth. Drill hole
spacing was at 150m centers, and along the 500m en-echelon East/West vein overlap. Drilling
was successful in extending mineralization an additional 100-200m, in addition to reaffirming
the local thickening of the Valdecanas Vein at depth. Note that mineralization remains open at
depth and along strike”.
Table 1 - Valdecanas Vein Intercepts: Sub-intervals not included
Source: MAG Silver news release, 04/23/2015
Highlighted Implications

“Results confirm our expectation that the Juanicipio project resource has the potential to
expand by at least 25% (as outlined in our initiation report; we ascribe a valuation of
US$42.2 million)”.

“Increasing vein thickness at depth in association with a late stage precious metals
overprint, will aid in the feasibility of potentially extending the mine deeper”.

“Metal/alteration zoning – getting deeper within the base metal zone as expected,
precious metals overprint may suggest that we are on top of another vein system”.

“Executable exploration upside (as opposed to property scale discovery exploration) may
peak the interest of 56% project owner/operator Fresnillo plc (FRES – LSE). Beyond
takeover conjecture, we will be looking to see if Fresnillo, through the JV entity Minera
Juanicipio, commits to a sizable exploration program”.
Figure 1 – Valdecanas Vein DDH P1-P4 Pierce Points, Inclined Longitudinal Section
Source: MAG Silver Corporate Presentation, 2015
2
MAG SILVER CORP.
MATERIALS
GEOLOGICAL INTERPRETATION
In the context of the recent drill results, P1 to P4:

Increasing concentrations of copper mineralization, in association with skarn alteration
at depth, is consistent with the base of an epithermal system (per Buchanan’s
Epithermal Model).

The high grade silver and gold overprint, marked by cross-cutting acanthite bearing
veins, is anomalous and more accurately reflects a shallower point within an
epithermal system.

MAG Silver hypothesizes that this discrepancy in metal zoning is the product of a shift
in the boiling level. This in theory suggests that below the current elevation of drilling
potentially exists another Bonanza Zone.
Figure 2 – Epithermal Deposit Model, Illustrating Shifted Boiling Level
Source: MAG Silver Corporate Presentation, 2015
MINING IMPLICATIONS
Reduction in mining dilution associated with increasing thickness of mineralized intercepts at
depth has the potential to reduce mining dilution from 25% (Mine #1) to less than 10% (Mine
#2). This would serve to offset the increasing costs associated with mining at increasing depths.
Processing synergies. It is expected that mineralization associated with Mine #2 will be of
comparable composition to that of Mine #1. As a result, the envisaged Mine #2 would not
require a separate processing facility, while increased throughput could be obtained through
the installation of additional parallel milling circuits. Note that with an increase in contained
copper, a floatation circuit will have to be evaluated.
3
MAG SILVER CORP.
MATERIALS
WHAT’S NEXT
Follow-Up Drill Program

MAG Silver reported that the last joint venture meeting with Fesnillo plc, post
Valdecanas Vein Deep results, was very productive, and that the group is committed to
a follow-up drill program.

Management notes that it has recently filed for a 10,000m surface exploration permit,
which it expects to receive in the coming months. In preparation for permit approval,
MAG Silver has begun drill pad construction at site.

Note that a final budget for this drill program has yet to be approved, but management
guides to US$120-150/drill meter. Given the increased depth of the targeted holes, it is
expected that costs will exceed these estimates.

As outlined in Figure 3 below, the next round of surface drilling will target an
additional 100-150m step-out at depth. Should this prove successful, management
envisages subsequent drill programs to be conducted from underground, a savings of
300-400m per hole.
Figure 3 – Planned drill program, step-out drill pierce points
Source: MAG Silver Corporate Presentation, 2015
4
MAG SILVER CORP.
MATERIALS
VALUATION
Although we share management’s enthusiasm with regards to the recent drill results, we feel
that it is too early to be ascribing additional value to Juanicipio in the context of a Mine #2. In
this report, we amended our applied exploration credit valuation, from a blanket 25% increase
to the project resource, to a weighted average increase in tonnage. This approach yields an
effective increase to the current resource of 28%, which increases our applied exploration credit
to US$46.6 million from US$42.2 million.
We believe that this approach supports our ongoing valuation thesis with regards to
Juanicipio’s exploration upside, while setting the stage to more accurately evaluate future
exploration results.
Table 2 – Weighted Average Resource Expansion
2014 Updated Resource Estimate
Resource Category
Tonnage
Mt
Silver
Moz
Gold
koz
Lead
Mlb
Zinc
Mlb
Indi ca ted
10.1
166
552
423
779
Inferred
5.1
61
328
202
315
Tota l
15.2
227
880
625
1094
Weighted Average Resource Expansion
Resource
Expansion (%)
Probability
Tonnage
Mt
Silver
Moz
Gold
koz
Lead
Mlb
Zinc
Mlb
20%
75%
2.3
34
132
94
164
40%
15%
0.9
14
53
38
66
60%
7%
0.6
10
37
26
46
80%
3%
0.4
5
21
15
26
4.2
63
243
173
302
Tota l
100%
Source: Salman Partners Estimates
RECOMMENDATION
With adjustments made to our applied Juanicipio exploration credit (US$46.6 million from
US$42.2 million), in addition to Salman Partners’ revised 2015 FX and commodity price
forecasts, our target price for MAG Silver increases to $12.05 per share (previously $11.50 per
share). We maintain our BUY recommendation.
Table 3 – MAG Silver NAV Valuation
Interest
Multiple
44%
44%
0.9x
Juanicipio (NPV5%)
Juanicipio Exploration (In-situ)
Cinco de Mayo
Upper Manto (In-situ)
Pozo Seco (In-situ)
Salamandra (Assigned)
Guigui (Assigned)
Mine Assets
100%
100%
In-Situ
AgEq @ $1.00/oz
2/3 ZnEq @ $0.03/lb
1/3 AgEq @ $0.45/oz
1/3 MoEq @ $0.05/oz
55%1
100%
Corporate Adjustments
Exploration Expense
NAV (US$)
NAV (Cdn$)
Millions (US$)
Per Share (US$)
$413.5
$46.6
$5.73
$0.65
$100.7
$1.40
$10.1
$0.14
$20.0
$10.0
$600.9
$0.28
$0.14
$8.33
$76.5
($4.5)
$672.9
$869.2
$1.06
($0.06)
$9.33
$12.05
Salman 12 mo nth fo rward avg. $ Cdn/$ US = 0.7741
1
2015 explo ratio n pro gram to co mplete 55% earn-in co mmitments
Source: Salman Partners estimates
5
MAG SILVER CORP.
MATERIALS
COMPANY SUMMARY & FORECASTS
All figure s in Cdn$ unle ss othe rwise note d.
Share Pric e
Recommendation
69.2
Targe t Pric e (Cdn$)
Share s Dilute d (M)
73.1
Pote ntial Re turn
Marke t Cap, O/S (M)
$696.6
20%
14.1%
Toc que ville Asse t Mgmt LP
9.5%
Mason Hill Advisors
9.4%
-
Van Ec k Assoc iate s Corp
5.9%
Divide nd Yie ld
Working Capital (US M)
$83.5
One -Ye ar Avg. Daily Volume
NAVPS
Major Holders (% of shares O/S):
-
$86.3
-
BUY
$12.05 Fre snillo PLC
Divide nd Rate
Cash (US M, e st.)
De bt (M)
Share Price Valuation
248,991 Blac kRoc k Inve stme nt Mgmt
(US$/share)
5.9%
Upcoming C atalysts
$12.05
Juanic ipio Valuation (NPV5% *0.9x + In-situ)=
$6.38
-Juanic ipio proje c t de ve lopme nt/c onstruc tion de c ision
0.0
Exploration Portfolio (In-situ/Assigne d)=
$1.95
-Exploration re sults: Juanic ipio, Salamandra, Guigui
Silve r Re sourc e s (P&P&M&I, M ozs)
165.9
Adjustme nts =
$1.00
-Cinc o de Mayo land ac c e ss agre e me nt with Ejido
Silve r Re sourc e s (all c ate gorie s, M ozs)
226.9
Valuation Me thodology:
NAV valuation, base d on: Juanic ipio adjuste d NPV 5% , in-situ/assigne d valuation on e xploration portfolio, asse t/liability adjustme nts
Silve r Re se rve s (P&P, M ozs)
Source: Salman Partners estimates
6
$10.07
Share s O/S (M)
Target Price (C dn$/share) = $12.05
MAG SILVER CORP.
MATERIALS
COMPANY DESCRIPTION
MAG Silver Corp. is a Vancouver-based junior mining company focused on exploration and development in north centralnorthwestern Mexico. The company’s flagship asset, Juanicipio, a world-class silver-lead-zinc epithermal intermediate
sulphidation deposit, was discovered by MAG Silver in 2003 and is scheduled to be commissioned in early 2018. MAG Silver holds
a 44% interest in the Minera Juanicipio S.A. de C.V., a Mexican incorporated JV which holds 100% of the Juanicipio asset. Fresnillo
plc, a London exchange-listed company (FRES – LSE), owns the remaining 56% interest and serves as the project operator.
7
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A recommendation to purchase a stock which represents the best risk/reward ratio within an analyst's
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Buy
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Ratings Distribution & Investment Banking Disclosure
Covered companies in each Category Within the last 12 months, Salman Partners has
provided investment banking services for:
TOP PICK (TP) 5%
TOP PICK (TP) 20%
BUY (B) 23%
BUY (B) 9%
HOLD (H) 14%
HOLD (H) 7%
SELL (S) 0%
SELL (S) 0%
SPECULATIVE BUY (SB) 13%
SPECULATIVE BUY (SB) 31%
UNDER REVIEW (UR) 44%
UNDER REVIEW (UR) 2%
RESEARCH
Terry Salman, B.A., MBA, D. Tech., h.c.
Mike Plaster, CFA
Co-Director of Research
Co-Director of Research
604-685-2450
604-622-5295
Investment Analyst
416-360-4384
Investment Analyst
604-622-5295
Senior Analyst
Investment Analyst
Investment Analyst
Investment Analyst
Research Associate
416-214-2749
604-622-5293
416-261-8786
604-622-5583
604-622-5298
Senior Analyst
416-861-1610
Investment Analyst
416-861-9901
Industrials & Special Situations
Kam Mangat, CFA
Materials & Alternative Energy
Mike Plaster, CFA
Mining, Fertilizers & Chemicals
Raymond Goldie, Ph.D., Geology
Ash Guglani, B.BA
Nik Rasskazovskiy, MBA
Kevin MacKenzie, P.Geo., MBA
Dennis Lo, MBA
Oil & Gas
Nav Malik, MBA
Technology
Daniel Wong, MBA
INSTITUTIONAL SALES & TRADING
Garry Rubacha, B.Com., CFA
Tom English, B.A. Econ
Ritu Gupte, B.Com., MBE
John McBride, B.A.
David Kwan, CFA
Lana Bisset
Tom George
1-800-877-7044
Co-Head Institutional Equity Sales
Co-Head Institutional Equity Sales
Institutional Equity Sales
Institutional Equity Sales
Institutional Equity Sales
Institutional Equity Sales & Trading
Institutional Equity Trading
416-861-1639
416-861-1507
416-360-5539
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604-622-5277
604-622-5284
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