It's no wonder why analysts at Canaccord Genuity call Juanicipio, "simply one of the most attractive undeveloped silver projects on the planet."

Crunching the Numbers

A scoping study was done a few years back and the numbers are truly remarkable - especially considering the low silver price used in the calculations ($12 silver).

Based on a scoping study done in 2009, the NPV (Net Present Value) of the Juanicipio project is estimated at US$ 967M using a 5% discount rate and a silver price of US$12.32 per ounce. That means MAG's share at 44% is estimated at US$425.5M. The payback period is 2.3 years with an estimated CAPEX of US$ 217.0M.

Operating cost were estimated at US$ 42.28 per tonne milled, which means that the unit cost per ounce of accountable silver sits at only US$ 2.56. Considering silver is over US$33 /ounce today, that spells significant profits for MAG and anyone developing this project.

If we were to use a higher silver price in our calculations, say US$15 /ounce, MAG's NPV would soar to over $1.1 billion. That means every dollar increase in the price of silver adds another $100 million plus to MAG's NPV. Just take a look:

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This scoping study is based on a stand-alone mine development, with a 3.5 year development timeline to advance ramp down to the Valdecanas mineralization. While there are no current studies for alternative development scenarios, much of the CAPEX costs could be reduced significantly and development timeline significantly shortened if MAG were to use Fresnillo's current infrastructure. By drifting over from the Jarillas shaft less than 1km away, the development timeline could potentially be reduced to 18 months, instead of the 3.5 years estimated in the scoping study.

Furthermore, even if mine development were to commence without the use of Fresnillo's nearby infrastructure, the payback period given today's current silver price could be less than a year. Try finding another silver project like this.

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In addition to Juanicipio, MAG Silver Corp (TSX: MAG)(NYSE.A: MVG) also has a strong portfolio of promising high grade silver district projects in Mexico. One of these projects is their 100% owned Cinco de Mayo, which contains a high grade Moly-Gold project that alone would be a major company maker.

Cinco de Mayo, Pozo Seco & Jose Manto Projects

The Cinco de Mayo property comprises 22,000 hectares and is the most advanced of MAG's five Carbonate Replacement Deposit ("CRD") style targets.

MAG Silver Corp (TSX: MAG)(NYSE.A: MVG) has already outlined a 147 million pound high grade molybdenum deposit at Pozo Seco within Cinco de Mayo. The deposit is entirely oxidized and possess a very high average molybdenum grade of 0.13%.

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Over the next few months, MAG is expected to release - for the first time - a new PEA (Preliminary Economic Assessment) that should show the potential for their Pozo Seco high grade Moly project. That means more news and more milestones to come for the company that already has one of the most attractive undeveloped silver projects in the world.

In addition, MAG continually intercepts significant massive sulphides in its on-going exploration drilling at Cinco de Mayo, including a most recent hole of 386 grams per tonne (g/t) (12.4 ounces per tonne (opt)) silver with 14.0% zinc and 8.2% lead over 3.98 metres (298.88 to 302.86 metres downhole) including a high grade core of 1,170 g/t (34.0 opt) silver with 13.7% zinc and 19.1% lead over 0.86 metres.

Of course, like any smart explorer, MAG Silver Corp (TSX: MAG)(NYSE.A: MVG) also has other significant and highly prospective projects in the Mexico Area. You can read more about them below.

Combined with Juanicipio, MAG is on the way to a breakout year. Analysts from all over the nation are calling the Juanicipio project one of the richest and highest grade silver deposits in the world and simply one of the most attractive undeveloped silver projects on the planet.

With such an amazingly high grade silver project, you may be asking yourself: "Why haven't I heard of MAG before and why isn't the company trading at much higher prices?"

Why MAG Silver is Under the Radar

In 2008, Fresnillo, which owns 56% of the Juanicipio project, tried a low-balled hostile takeover offer of MAG for US$4.54 per share without any success. During that time, MAG filed a formal request for arbitration on the grounds that Fresnillo attempted to acquire control of MAG on a hostile basis, in breach of standstill provisions contained in the shareholders agreement governing the Juanicipio joint venture.

Two years later, in 2011, the arbitration ruling was issued. And MAG had not only won, but ended up with a much easier path to success.

The arbitration ruling stipulated that any deal would need to be friendly, any offer would need to be cash. Fresnillo must move the project forward with MAG in a reasonable time frame - meaning Fresnillo cannot hold back on moving the project forward to suppress MAG's progress. As a matter of fact, exploration budgets have already increased this year.

As a result of the ruling, MAG's share prices rocketed to over $14 last year, only to be pulled back with the rest of the market. But with silver prices expected to climb in 2012, an updated PEA out within the next few weeks, and nearly $11 million of exploration underway for both Juanicipio and Cinco de Mayo, this could be the breakout year for MAG Silver.

It's Getting Crowded

Silver is an asset whose consumption will exceed new production for many years. With just $50 billion of silver bullion above ground, the silver market is a very small market and gets crowded easily. The amount of silver stocks with strong assets are very limited and very few discoveries are being made worldwide.

Over the next few years, we're going to see a lot of consolidation in the silver space - especially for companies with high grade projects.

It's already happening...

Just last week, we saw the takeover of Minefinders by Pan American Silver for $1.6 billion.

So how does Minefinders' silver project compare to MAG's?

According to Morningstar:

Most of Minefinders' silver reserves and all of its current production come from its Dolores open-pit mine in northwest Mexico. Dolores is projected to produce more than 65,000 ounces of gold and 3.4 million ounces of silver in 2011 at cash costs of between $11 and $12 per silver-equivalent ounce (assuming a 41/1 gold to silver price ratio), but seems capable of supporting a much larger annual production rate given its sizable silver reserves.

Dolores' low cash costs should also help Pan American better control its production cost inflation, as the firm's existing silver mines are projected to reach cash costs of more than $18 per silver-equivalent ounces in 2011.

Based on the 2009 scoping study, MAG's unit cost per ounce of accountable silver (net of by product credit and TTM* costs) is expected to be US$1.77 - a big difference to the US$11-12 cost of Minefinders and an even bigger difference to Pan American's US$18.

Clearly you can now see why analysts are calling Juanicipio one of the most important high grade silver projects on the planet.

Silver prices are near $35/oz and are expected to climb much higher. You can do the math.

Timing is Crucial

There's no doubt that MAG has one of the most promising silver projects in the world. But that's not the only reason I am about to buy their shares right now.

Within the next few weeks, MAG is about to hit a critical milestone that could send share prices much higher than where it is today...

MAG is about to announce an updated PEA using much higher silver prices than the PEA done in 2009. The upcoming PEA on one of the world's highest grade silver deposits is going to be a critical milestone for MAG as it will truly show the real value of what the Juanicipio project has to offer.

To give you an example of how big an impact an updated PEA can be, let's go back and look at Hathor - the company that hosted one of the world's richest uranium deposits.

As you can remember, just a few weeks before Hathor announced their new PEA, not only did their share price soar, but takeover bids and rumours started to pour in with Cameco making the first unsuccessful bid.

Once Hathor's new PEA was released, mining giant Rio Tinto made their move and bought Hathor at significantly higher prices.

While in a different sector, the MAG story has many similarities. While Hathor had one of the richest uranium deposits in the world, MAG has one of the richest silver deposits in the world. Hathor received a failed low-balled takeover attempt by Cameco. MAG received a failed low-balled take-over attempt by Fresnillo.

Once MAG's new PEA comes out in the next few weeks, you can be sure Fresnillo will be watching as other big shots in the silver space drool over MAG's asset. With the new PEA, the NPV for MAG would not only rise significantly based on higher silver prices, but it also means that Fresnillo would have to pay more for MAG if it wanted to buy MAG out.

It's obvious that MAG is a likely acquisition target.

Fresnillo has already boldly claimed that it has a goal of increasing its annual production to 65 million ounces of silver by 2018, up from a current production of around 42 million ounces.

The Juanicipio project is expected to produce an average of 14 million ounces of silver annually. While 100% of Juanicipio would not likely get Fresnillo to its bold goals, it should certainly help the company along the way.

It's apparent that Fresnillo would be the smartest and most economical suitor of the Juanicipio project. If Fresnillo were to use its existing infrastructure as I had already mentioned, not only would the CAPEX be significantly reduced, but the timeline would also be dramatically shortened (potentially down to 18 months from 3.5 years.) The reduced cost and shortened timeline makes a compelling and obvious reason why Fresnillo should make a move.

Of course, the only thing that stands in the way is the recent past between MAG and Fresnillo. But at the end of the day, the courts have made their decision and any deal Fresnillo wants will not only have to be friendly, but have to be all cash. The only question is will Fresnillo come to a friendly agreement with MAG?

If Fresnillo doesn't make a move soon, I wouldn't be surprised to see other suitors come to the table before MAG continues to increase its value via further exploration work on Juanicipio and its other properties. The big institutions feel the same way:

"If Fresnillo does intend to eventually acquire MAG`s interest in Juanicipio, with an increased in exploration budget from last year, an updated PA for the Juanicipio project, and new value to be created at its Cinco De Mayo and Pozo Seco projects, the potential cost of acquiring MAG is likely only to increase over time.

The challenge of structuring a friendly deal between the two companies is obvious, but despite the history, the argument supporting the potential friendly bid for MAG appears compelling. Even without a bid from Fresnillo, we believe the outlook for MAG has improved, which could potentially attract other suitors." - Canaccord, January 22, 2012

Fresnillo is the biggest player in the primary silver space and you can bet they wouldn't want any partners on their home turf - especially when MAG is sitting right in their backyard.

MAG is already undervalued based on a 0.75x multiple to Canaccord's peak silver price estimate of NAVPS (net asset value per share, 7.5% US$35/oz Ag). With an updated PEA on Juanicipio, an upcoming PEA on Pezo Seco, drill results coming from their other high grade silver projects, and the possibility of a takeover, MAG will undoubtedly be the focus of anyone in the silver space.

MAG's management is top notch and their share structure is rock solid. Management has been able to turn MAG from a penny stock to where it trades today - all without diluting shareholders. They have over US$27 million in the bank and less than 60 million shares outstanding when fully diluted. That is an amazing task considering the progress MAG has made.

The real silver boom is about to begin.

That is why I will be investing in "one of the most important high grade silver projects on the planet."

Ivan Lo
Equedia Weekly


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