MAG Silver’s low-risk Juanicipio gets wider at depth

George Paspalas has spent the last 30 years building and operating complex open-pit and underground mines in South Africa, Tanzania, Australia, South America and Canada for the likes of Placer Dome, Silver Standard Resources and Aurizon Mines.

His repertoire includes Big Bell, Granny Smith, South Deep, Wallaby, Pirquitas and the North Mara Expansion. But nothing he has worked on compares with the Juanicipio mine that MAG Silver (TSX: MAG; NYSE-MKT: MAG) and partner Fresnillo (LSE: FRES) are building in Mexico.

“I’ve built six mines but this is the most exciting thing I’ve been associated with in mining, and I have been associated with some pretty exciting things,” says Paspalas, who joined MAG Silver as president and CEO three years ago. 

It’s not a stretch to understand why.

The Juanicipio project in the Fresnillo district of Zacatecas is the highest-grade undeveloped silver asset in the world, with grades of over 600 grams silver per tonne.

The project, a joint venture between MAG Silver (44%) and Fresnillo (56%), the operator, is situated in Mexico’s Fresnillo district, the most prolific silver district in the world, where 4.2 billion oz. silver has been mined over the last 500 years.

“I’ve worked on high-grade mines but never worked on high grade like this,” Paspalas says in an interview. “What we have is a low temperature forming environment, which results in very good metallurgy, and a nice high angle of dip and width, which facilitates mechanized mining and efficient extraction. Coupled with the experience and ability of Fresnillo as the operator, the value of the high grade is maximized on this project.”

So far, MAG Silver has identified three high-grade silver veins: Valdecanas, with its footwall offshoot the Desprendido vein, and the Juanicipio vein.

“Juanicipio is small but high grade — it has multiple kilos per tonne of silver, but over 90% of the metal is contained in the Valdecanas vein, that’s the big one,” Paspalas says, adding that MAG Silver discovered Juanicipio on its first drill hole and Valdecanas on its sixteenth.

“Once we hit Valdecanas we realized we had something big,” he continues. “I get excited when I tell this story. It’s unbelievable the opportunity here, and the geological endowment is something pretty unique.”

The portal at MAG Silver and Fresnillo’s Juanicipio high-grade silver project in Mexico’s Zacatecas state. Credit: MAG Silver.

Paspalas jokes that the company can’t seem to get away from the Valdecanas vein. “We drilled below it, and it got five times bigger in width,” he says. “It’s apparent now that the Valdecanas vein is sitting on where there was a major fluid ore input that mineralized perhaps that whole Valdecanas system … and if you look at other fluid ore input points around the district, there is more than one vein.”

In addition to the silver, the veins at Juanicipio host gold, lead and zinc.

The gold content of the deposit in the Bonanza zone alone accounts for 7% of the project’s revenue, Paspalas says. “They’re high silver grades, yes, but that gold grade over the tonnage we have in the Bonanza zone is 1 million oz. gold. It’s a million-ounce gold deposit that most people would kill for … and you have other contributions from lead and zinc.”

As for the high-grade silver, it makes the project resilient at lower silver prices. At a silver price of US$18 per oz., the mine would generate an after-tax cash flow for MAG Silver of US$75 million a year for the first six years and translate into a 33% after-tax internal rate of return (IRR). At US$20 per oz. silver the cash flow rises to US$85 million and the IRR to 38%. But at a US$10 per oz. silver price, the IRR generated is a fairly robust 15%, and the after-tax cash flow comes in at US$40 million.

The Bonanza zone, which runs from 350 to 750 metres deep, contains indicated resources of 8.3 million tonnes grading 601 grams silver per tonne, 1.7 grams gold per tonne, 2% lead and 3.7% zinc, for 160 million contained oz. silver. Inferred resources add 2.4 million tonnes averaging 626 grams silver, 1.9 grams gold, 1.4% lead and 2.2% zinc, for 48 million contained oz. silver.

But a year and a half ago, the joint-venture partners discovered a deeper zone below the Bonanza zone from an 800-metre vertical depth — or 100 metres below the last known mineralization.

The deep zone was discovered when the joint venture drilled four holes in April 2015 that were intended to close out the Bonanza zone and define the parameters of the asset so that engineering studies could begin.

The four holes showed that the average width of the Valdecanas vein went from an average of six metres in the Bonanza part of the deposit, to anywhere from 11 to 32 metres wide in the Deep zone.

MAG Silver recently released assay results from 12 holes ranging from 850 to over 1,200 metres deep that were drilled from December 2015 through August 2016. The drilling showed that mineralization in the Deep zone is traceable over a strike length of 800 metres, and the structures remain open to depth and laterally.

Drilling highlights included 36.5 metres (29.9 metres true width) grading 235 grams silver, half a gram gold, 4.8% lead, 5.8% zinc and 1% copper. The drilling also uncovered a fourth vein, Anticipada, with a 6.7-metre (true width) intercept grading 105 grams silver, 2.69 grams gold, 3.6% lead, 10.8% zinc and 0.2% copper.

Six drill rigs are operating — five from surface and one from underground — to pursue the possible extension of the new zone to the east by 700 metres and to the west by 300 metres.

Paspalas says that “as you peel the onion on this and go down the layers, you just keep thinking: ‘My God, this gets better and better.’”

Michael Curlook, MAG Silver’s vice-president of investor relations and communications, adds that finding the Deep zone with its wider widths has enormous implications for the project in terms of mining efficiencies and capital costs.

“It means that all of a sudden your mining efficiencies go up, because you don’t have to spend more capex to go lower,” Curlook says. “And you don’t have as much dilution because of the width. If there is enough tonnage you could have a second project and you don’t have to spend any more capex getting to it, and your IRR goes through the roof. So what you would have is a second project that has a lower cost than the [Bonanza zone] above it.”

Meanwhile, the Valdecanas vein on the joint-venture property extends onto the Jarillas vein on Fresnillo’s adjacent Saucito mining operation, 2 km away. Fresnillo commissioned Jarillas in 2014, so by the time Valdecanas moves into production in mid-2018, Fresnillo will have been mining Jarillas for over three years and better understand its attributes. 

Fresnillo has built mines for the last 130 years, and MAG Silver benefits from its experience. “You have one of the best assets on paper, for sure, a tier-one asset,” Paspalas, “that probably is being built by the best people on earth to build it.”

As far as its relationship with Fresnillo is concerned, the partnership is running smoothly. “We enjoy a really good relationship with Fresnillo now,” Paspalas says. “There was a bit of a speed bump when they attempted a hostile takeover in 2008. They’re doing a great job on the ground and are making great decisions, so we’re fortunate to have them as the operator.”

Over the last couple of years, the partners have built an access ramp to 3,200 metres deep, and expect it will reach the resource in the Valdecanas vein by year-end, or in early 2017. The decline is fully concrete-lined and floored. Stope development starts in 2017, and if all goes well, the mine could produce by mid-2018.

A construction decision could come in the next two months.

In addition to the infill drilling at Juanicipio, the joint venture has set aside US$5.2 million for an exploration program in 2017 that looks at other targets. MAG Silver has only drilled one target (which found Juancipio) of the six it has identified.

Capex for the mine is an estimated US$302 million. MAG Silver’s share is US$132 million. The company has spent US$13 million so far and has US$119 million left.

MAG Silver is well funded to pay its share, management says, with US$141 million in the bank, and no debt.

Twelve research analysts are covering the company, and it has an average $23.11-per-share target price.

At press time the company’s shares traded at $17.84 apiece, within a 52-week trading range of $8.67 to $23.32.