JUANICIPIO PROJECT
Municipio Fresnillo Zacatecas, Mexico

 

(expressed in thousands of US dollars except as otherwise noted)

MAG Silver Corp. is a growth-oriented Canadian development and exploration company focused on becoming a top-tier primary silver mining company by exploring and advancing high-grade, district scale, precious metals projects in the Americas. Its principal focus and asset is the 4,000 tonnes per day Juanicipio Project (44%), operated by Fresnillo Plc (56%). The project is located in the Fresnillo Silver Trend in Mexico, the world's premier silver mining camp, where in addition to underground mine production and processing of mineralised material, an expanded exploration program is in place targeting multiple highly prospective targets. MAG is also executing multi-phase exploration programs at the Deer Trail 100% earn-in Project in Utah and the Larder Project, located in the historically prolific Abitibi region of Canada.

HISTORY AND BACKGROUND

MAG owns 44% of Minera Juanicipio, S.A. de C.V. (“Minera Juanicipio”), a company incorporated under the laws of Mexico, which owns the Juanicipio Mine. Fresnillo is the operator and holds the remaining 56%. On December 27, 2021, for various business reasons, the Company and Fresnillo incorporated Equipos Chaparral, S.A. de C.V. (“Equipos Chaparral”) in the same ownership proportions as Minera Juanicipio for the purpose of holding the Juanicipio processing facility and mining equipment to be leased to Minera Juanicipio. As MAG has a 44% interest in each of Minera Juanicipio and Equipos Chaparral, the two are collectively referred to herein as “Juanicipio”.

MAG independently commissioned AMC Mining Consultants (Canada) Ltd. (“AMC”) to prepare a Resource Estimate and Preliminary Economic Assessment for the Juanicipio Project, which was completed in accordance with NI 43-101 and announced by the Company on November 7, 2017. AMC subsequently prepared a revised version of the technical report titled “MAG Silver Juanicipio NI 43-101 Technical Report (Amended and Restated)” with an effective date of October 21, 2017 and a revised date of January 19, 2018 (the “2017 PEA”). As shareholders of Minera Juanicipio, Fresnillo and MAG jointly approved the Juanicipio Project mine development on April 11, 2019, following which project construction commenced immediately and the underground mine development continued.

Development and exploration of, and production from, the Juanicipio Mine are all being carried out by the project operator, Fresnillo, with MAG being represented in all Juanicipio board of directors, technical committee, joint health and safety committee and ad-hoc meetings. Commissioning of the processing facility was performed under the guidance of an Engineering, Procurement and Construction Management contract entered into with an affiliate of Fresnillo. MAG’s share of project costs was funded by operating cash flow from underground mine production, by cash calls through its 44% interest in Juanicipio and, to a lesser extent, incurred directly by MAG to cover expenses related to its own commissioned technical studies and analyses, as well as direct project oversight. Minera Juanicipio is governed by a shareholders’ agreement and corporate by-laws, pursuant to which each shareholder is to provide funding pro-rata to its ownership interest. An operator services agreement became effective upon initiation of commercial production whereby Fresnillo and its affiliates continue to operate the mine (the “Operator Services Agreement”). Both lead and zinc concentrate offtake agreements have been executed by Minera Juanicipio with Met-Mex Peñoles, S.A. de C.V. (“Met-Mex”) (an affiliate of Fresnillo), under which both concentrates are being sold and treated at international benchmark market terms in Torreón, Mexico.

Underground development and construction of surface infrastructure and facilities progressed largely according to the plan envisioned in the 2017 PEA, with the exception of the commissioning of the 4,000 tpd processing facility (see “Processing Facility Construction and Commissioning” below). The Juanicipio beneficiation plant, which was energized following connection to the national power grid in December 2022, commenced commissioning and full-scale ramp-up of milling activities in Q1 2023. In March 2023, Juanicipio commenced concentrate production and shipped its first commercial lead and zinc concentrates. According to operator Fresnillo, the operation remains on track to reach nameplate production in Q3 2023. Excess mineralized material from Juanicipio continues to be processed through the nearby Saucito and Fresnillo beneficiation plants (100% owned by Fresnillo) (see ‘Underground Mine Production’ below) on an available capacity basis.

Total Juanicipio Project expenditures incurred and capitalized by Juanicipio (on a 100% basis) for the three months ended June 30, 2023 amounted to $20,040 (six months ended June 30, 2023: $40,328). Of the total capitalized expenditures, $11,577 (six months ended June 30, 2023: $23,134) are development expenditures, $6,535 (six months ended June 30, 2023: $13,133) are sustaining capital expenditures (capital expenditures that are intended to maintain ongoing operations), and $1,928 (six months ended June 30, 2023: $4,061) are exploration expenditures.

Gross profit (revenue less cost of sales including depreciation and amortization) from processing Juanicipio mineralized development and stope material at the Juanicipio, Saucito and Fresnillo plants for the three and six months ended June 30, 2023 totalled $62,804 and $78,953 respectively (three and six months ended June 30, 2022: $37,262 and $83,483, respectively) on a 100% basis (see ‘Underground Mine Production – Juanicipio Project’ below).

UNDERGROUND MINE PRODUCTION

In the three months ended June 30, 2023, a total of 377,018 tonnes of mineralized development and stope material were processed through the Juanicipio, Saucito and Fresnillo plants. The resulting payable metals sold and associated processing details are summarized in the following table. The sales and treatment charges for tonnes processed in Q2 2023 were recorded on a provisional basis and will be adjusted in the third quarter of 2023 based on final assay and pricing adjustments in accordance with the offtake contracts.

Mineralized Material Processed at Juanicipio, Saucito and Fresnillo Plants (100% basis)

Three Months Ended June 30, 2023 (377,718 tonnes processed)				Q2 2022 Amount $
Payable Metals	Quantity	Average Per Unit $	Amount $
Silver	4,877,460 ounces	23.69 per oz	115,555	47,070
Gold	9,537 ounces	1,957.47 per oz	18,668	9,388
Lead	3,066 tonnes	0.94 per lb.	6,367	2,135
Zinc	4,582 tonnes	1.07 per lb.	10,807	6,199
TCRCs and other processing costs			(16,622)	(9,568)
Net Revenue			134,775	55,224
Production and transportation costs			(54,571)	(12,717)
Depreciation and amortization (1)			(17,400)	(5,245)
Gross Profit			62,804	37,262

⁽¹⁾ The underground mine was considered readied for its intended use on January 1, 2022, whereas the Juanicipio processing facility started commissioning and ramp-up activities in January 2023, achieving commercial production status on June 1, 2023.

In the six months ended June 30, 2023, a total of 599,741 tonnes of mineralized development and stope material were processed through the Juanicipio, Saucito and Fresnillo plants. The resulting payable metals sold and associated processing details are summarized in the following table.

Mineralized Material Processed at Juanicipio, Saucito and Fresnillo Plants (100% basis)

Six Months Ended June 30, 2023 (599,741 tonnes processed)				Six Months Ended June 30, 2022      Amount $
Payable Metals	Quantity	Average Per Unit $	Amount $
Silver	6,878,434 ounces	23.47 per oz	161,430	102,969
Gold	14,827 ounces	1,958.20 per oz	29,035	19,678
Lead	4,348 tonnes	0.94 per lb.	9,028	4,619
Zinc	6,238 tonnes	1.16 per lb.	16,015	11,911
TCRCs and other processing costs			(29,251)	(19,037)
Net Revenue			186,257	120,140
Production and transportation costs			(81,949)	(27,981)
Depreciation and amortization (1)			(25,355)	(8,676)
Gross Profit			78,953	83,483

⁽¹⁾ The underground mine was considered readied for its intended use on January 1, 2022, whereas the Juanicipio processing facility started commissioning and ramp-up activities in January 2023, achieving commercial production status on June 1, 2023.

The average silver head grade for the mineralized development and stope material processed in the three and six months ended June 30, 2023 was 498 g/t and 448 g/t respectively (three and six months ended June 30, 2022: 567 g/t and 582 g/t, respectively). The lower head grades were impacted by the processing of lower grade stockpiles which were earmarked for the commissioning and ramp-up phase of the Juanicipio processing facility. Since completing its start-up phase in March 2023, the Juanicipio processing facility has been operating at approximately 85% of its nameplate of 4,000 tpd with silver recovery consistently above 88%.

The increase in Q2 2023 net revenue quarter‐on‐quarter ($186,257 in the current quarter compared to $51,482 in Q1 2023) was a function of a 137% increase in blended metal volumes and a 1% increase in realized blended metal prices. The higher metal volume was driven predominantly by a 70% increase in tonnes processed and a 37% higher silver head grade as higher grade material was introduced to the Juanicipio processing facility following its successful commissioning and ramp-up phase.

From August 2020 to June 30, 2023, a total of 1,569,653 tonnes of mineralized material from the Juanicipio Mine have been processed, with 330,799 tonnes at the Juanicipio processing facility and 1,238,854 tonnes at the two Fresnillo processing plants. By bringing forward the start-up of the underground mine and processing mineralized development and stope material at the Fresnillo plants in advance of commissioning the Juanicipio processing facility, MAG and Fresnillo secured several positive outcomes for the Juanicipio Project:

• generated cash-flow from production to offset some of the cash requirements of the initial and sustaining capital;
• realized commercial and operational de-risking opportunities;
• de-risked the flotation process and reagent mix through a better understanding of the metallurgical characteristics and response of the Juanicipio mineralization;
• increased certainty around the geological block model prior to start-up of the processing facility; and
• is expected to allow a faster and more certain ramp-up to the nameplate 4,000 tpd processing facility design.

PROCESSING FACILITY CONSTRUCTION AND COMMISSIONING

The Juanicipio Project team delivered the 4,000 tpd processing facility for commissioning in the fourth quarter of 2021. However, as previously reported, in late 2021, the Comisión Federal de Electricidad (“CFE”), a state-owned electrical company, notified Fresnillo that approval to complete the tie-in to the national power grid could not yet be granted and the processing facility commissioning timeline would therefore be extended. This delay primarily related to staffing effects related to the COVID-19 pandemic on the state-owned electrical company. To mitigate the effect on cash flow generation from the Juanicipio Project while CFE approvals were pending, Fresnillo made available unused plant capacity at its Saucito and Fresnillo operations to process mineralized material produced at the Juanicipio Project during this period, matching commissioning and ramp up tonnages that were previously expected, where possible. On December 28, 2022, the Company announced its receipt of CFE approval, the completion of the electrical tie-in to the national power grid and the envisioned commissioning of the 4,000 tpd processing facility. Commissioning commenced in early January 2023 with feed of lower grade mineralized material to the grinding mills. Processing of higher-grade material commenced in April with commensurate improvements in silver recovery and associated concentrate grades. The Juanicipio processing facility has been operating at approximately 85% of its nameplate of 4,000 tpd with silver recovery consistently above 88%. On June 5, 2023, the Company announced that following a successful commissioning period, the Juanicipio mine, processing facility and other vital systems were operating in line with, or rapidly approaching design capacity, and therefore declared full commercial production effective June 1, 2023. All major construction activities have now been completed and Juanicipio is demonstrating its ability to sustain ongoing production levels.

UNDERGROUND DEVELOPMENT

As discussed above, the mineralized material encountered in underground development and from initial stopes at Juanicipio, is now being processed at Juanicipio as well as the nearby Fresnillo owned processing plants (see ‘Underground Mine Production’ above).

Now in full production, mineralized material from mining is hauled to an underground crushing station and crushed underground. The crushed mineralized material is trucked to the processing facility until the conveyor ramp and belt are completed. The upper and lower segments of the conveyor ramp were connected in December 2022, greatly improving ventilation and allowing conveyor construction to begin. When the conveyor is completed, the crushed mineralized material will be conveyed directly from the underground crushing station to the processing facility area via the conveyor ramp. The conveyor ramp provides access to the entire Valdecañas underground mining infrastructure and as mentioned above serves as a fresh air entry for the ventilation system. As well, the long-term mine ventilation system is nearing completion with the #1 and #2 ventilation shafts commissioned and ventilating some of the lower areas of the mine.

Total underground development to date is approximately 67 km (42 miles), including 3.43 km (2.13 miles) and 6.88 km (4.28 miles) completed during the three and six months ended June 30, 2023, respectively. Underground mine infrastructure is well advanced and development continues to focus on:

• advancing the three internal spiral footwall ramps to be used to further access the full strike length of the Valdecañas Vein System;
• making additional cross-cuts through the vein and establishing the initial mining stopes;
• finalizing construction of the underground warehouse, fuel storage and pumping station; and
• integrating additional ventilation and other associated underground infrastructure.

Due to the poor rock quality on the western section of the upper Valdecañas Vein, cut and fill has been chosen as the mining method for the higher levels in this section. Several longhole stopes have been in operation for the past year, and this will be the preferred mining method through the main central section and eastern side of Valdecañas Vein, and ultimately the west side as well, once ground conditions improve with depth.

PROJECT CAPITAL

With the processing facility completed and commercial production declared on June 1, 2023, all major construction activities have now been completed and Juanicipio is demonstrating its ability to sustain ongoing production levels. Going forward, cash flow from ongoing operations, along with the cash held by Juanicipio at June 30, 2023 of $8,539 on a 100% basis, are expected to substantially fund any remaining capital requirements as Juanicipio approaches free cash flow generation. Additional funding requirements related to market conditions (i.e. lower metal prices or higher inflation driving higher costs for instance), or for additional capital in excess of the operating cash flow generated may need to be funded by further cash calls required from Fresnillo and MAG (see ‘Liquidity and Capital Resources’ below).

OUTLOOK

On a 100% basis, after completion of the start-up phase, approximately 4.4 million ounces of silver have been produced from the Juanicipio processing facility from March 2023 to the end of June 2023, and production is expected to continue to increase steadily through Q3 2023 where it is envisioned the processing facility will be running at nameplate of 4,000 tpd. An Operator Services Agreement became effective upon the declaration of commercial production, whereby Fresnillo and its affiliates will continue to operate the mine. Subject to available capacity, excess mineralized material from Juanicipio may continue to be processed at the Fresnillo and Saucito processing plants (both 100% owned by Fresnillo), with the lead (silver-rich) and zinc concentrates treated at market terms under offtake agreements with Met-Mex.

EXPLORATION – Juanicipio Project

Most of the Juanicipio Project concession remains unexplored with many untested targets still to be pursued within the property. Drilling in recent years has been primarily designed to both convert the Inferred Mineral Resources included in the Deep Zone into Indicated Mineral Resources and to further trace mineralization to depth.

2023 Exploration Program

The Q2 2023 expenditures for the 2023 exploration program totalled $1,928 (six months ended June 30, 2023: $4,061) on a 100% basis, for drilling designed to expand and convert the Inferred Mineral Resources included in the Deep Zone into Indicated Mineral Resources and to explore other parts of the Juanicipio concession. Drilling is on-going with 3 surface rigs. Current drilling is focused on infilling the Valdecañas Vein System including Anticipada, Pre-Anticipada and the Venadas structures.

Beginning in mid-January 2022, drilling of four holes began on the Los Tajos target in the northwestern corner of the Juanicipio Project concession, roughly 6 km west of the Valdecañas Vein and related underground infrastructure. Thousands of tonnes of mixed kaolinite-illite clays have been mined over the last 25 years by the Cesantoni Ceramics Company from a series of pits developed along the strong northeast-trending Los Tajos structure. This orientation is almost orthogonal to the northwest-trending veins that dominate the district, but is roughly parallel to the high-grade Venadas Vein family that cuts the northwest-trending Valdecañas Vein. Drilling was executed with a highly portable rig to minimize surface disturbance and was completed in Q3 2022.

Due to permitting restrictions, drilling geometries were poor and the man-portable equipment was unable to reach optimal target depths. However, all four holes cut narrow quartz veinlets surrounded by alteration with assay signatures characteristic of high level intercepts. Follow-up drilling is planned from locations with better target geometries and more powerful equipment once surface access and permits are received.