Shares of Canadian junior silver miner MAG Silver (NYSEMKT:MAG) rose 16% in the first half hour of trading on April 27. Although the company's mining efforts in Mexico have been disrupted by COVID-19 containment efforts (news that was announced about a week ago), the company just got a 60 million-Canadian-dollar cash infusion from a major shareholder. That's a very big deal for this tiny precious metals miner.
MAG Silver isn't actually much of a miner at this point. That's not meant as a slight, just to highlight the fact that it is still building its first mine, the Juanicipio Project in Mexico. It's a joint venture with Fresnillo plc, which operates the project. MAG Silver owns a 44% stake in Juanicipio. As noted, progress on the mine has slowed due to social distancing restrictions in that country. That's not great, since it will delay completion of the project, but it doesn't actually impact revenues, since the mine isn't producing any silver. In fact, MAG Silver's income statement hasn't had any income for the last two years, just expenses.
That's not unusual in situations like these, but it costs a lot of money to build a mine, and MAG Silver is on the hook for 44% of the costs. That's true whether or not the mine gets built a little sooner or a little later. MAG Silver entered 2020 with CA$72 million in cash on the balance sheet, down from CA$130 at the start of 2019. With another year or two worth of construction ahead, cash was going to become a problem at some point even though the company has no debt. So when news hit that Eric Sprott bought CA$60 million worth of MAG Silver shares, investors reacted positively. Sprott Investments, it's worth noting, already had a material stake in the miner. Although MAG Silver wasn't out of money, the extra cash will certainly make it easier to keep paying for Juanicipio's construction costs.
MAG Silver is basically a bet that the Juanicipio mine will get built and produce silver in line with the project's expectations. At this point, that includes a 19-year mine line and all-in sustaining costs of around $5 per ounce of silver. Still, there's a lot that could go wrong from here, including construction headaches (like the delay related to COVID-19), silver prices materially declining, the mine falling short of profitability expectations, or MAG Silver not being able to fund its portion of development costs. While that last one isn't as big a deal as it was just a few days ago, the takeaway here is that MAG Silver is not an appropriate investment for conservative investors. However, after the cash infusion it just got, more adventurous types might want to do a deep dive.