Metals and Mining -- Exploration and Development
A CINCO DE MAYO SELL-OFF BUYING
OPPORTUNITY
Investment recommendation
We maintain our SPECULATIVE BUY recommendation on the shares of
MAG Silver with a revised 12-month target price of C$19.25 per share,
down from C$20.75 previously.
Investment highlights
„h MAG Silver responded to reports from local media in Mexico that
the Benito Juarez Ejido decided at an assembly meeting on
November 17 to expel MAG Silver from its Cinco de Mayo project
and establish a 100-year moratorium on mining.
„h From our discussions with MAG management, the company believes
there were irregularities in the way that this Ejido meeting was
organized and authorized, which call into question the validity of
the meeting. The company is scheduled to meet with the state and
federal governments to have the meeting and all resolutions passed
declared invalid.
Valuation
We believe this news obviously creates uncertainty around MAG¡¦s Cinco
de Mayo project. The Cinco de Mayo project previously represented 13%
of our peak silver price estimate of NAVPS. If we exclude any value for
Cinco de Mayo, we estimate an NAVPS (5%, spot) of $16.88,
representing a P/NAV multiple of only 0.59x for one of the highest
quality silver development projects in the world. Even without a positive
resolution to the Cinco de Mayo project, we see significant upside
potential in the shares of MAG. We believe that this sell-off represents a
buying opportunity. We have adjusted our valuation of Cinco de Mayo to
$0.75/oz of in situ silver-equivalent resource, down from $1.75/oz
previously. We estimate a peak silver price estimate of NAVPS (5%,
US$40/oz Ag) of C$21.32, down from C$23.05 previously. We continue
to value the shares of MAG Silver based on a 0.9x multiple to our peak
silver price estimate of NAVPS (5%, US$40/oz Ag).