• Juanicipio

JUANICIPIO PROJECT
Municipio Fresnillo Zacatecas, Mexico

 

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

MAG Silver Corp. is a Canadian development and exploration company focused on becoming a top-tier primary silver mining company by exploring and advancing high-grade, district scale, silver-dominant projects in the Americas. Its principal focus and asset is the Juanicipio Project (44%), being developed with Fresnillo Plc (56%), the operator. The project is located in the Fresnillo Silver Trend in Mexico, the world's premier silver mining camp, where the operator is currently developing an underground mine and constructing a 4,000 tonnes per day processing plant. Underground mine production of mineralized development material commenced in Q3 2020, and an expanded exploration program is in place targeting multiple highly prospective targets at Juanicipio. MAG is also executing a multi-phase exploration program at the Deer Trail 100% earn-in project in Utah and has recently acquired 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 high-grade silver Juanicipio Project located in the Fresnillo District, Zacatecas State, Mexico. Fresnillo is the project 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 plant 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”.

As shareholders of Juanicipio, Fresnillo and MAG jointly approved project mine development on April 11, 2019 and project construction of the plant commenced immediately and the underground mine development continued. A 4,000 tonne per day (“tpd”) processing facility has been constructed with commissioning planned to commence upon the electrical tie-in to the national power grid which is expected in the coming weeks (see ‘Processing Plant Construction – Juanicipio Project’ below). Since August of 2020, mineralized development material and more recently initial stope material from the underground mine is being processed at Fresnillo’s nearby processing plants.  This processing was originally targeted at an average nominal rate of 16,000 tonnes per month but has since increased to an average of 48,000 tonnes per month in the three months ended March 31, 2022 and an average of 51,000 tonnes per month in the three months ended June 30, 2022. This processing at the Fresnillo plants is expected to continue until the Juanicipio plant is fully commissioned (see ‘Underground Mine Production– Juanicipio Project’ below).

The mineralization on the Juanicipio Project consists of high-grade silver-gold-lead-zinc epithermal vein deposits. The principal vein, the Valdecañas Vein, has dilatant zones (bulges) at its east and west extremes and several en echelon vein splays and cross-veins – the term “Valdecañas Vein” is used to refer to this combined vein system. In addition, exploration continues both on the Valdecañas Vein system and on other prospective targets within the Juanicipio mining concession (see ‘Juanicipio Project’ below for a detailed current project update).

Development and production from, and exploration of the Juanicipio Project are all being carried out by the project operator, Fresnillo, with MAG being represented in all Juanicipio board, technical committee and ad-hoc meetings. Construction and commissioning of the processing plant is under the guidance of an Engineering, Procurement and Construction Management contract entered into with an affiliate of Fresnillo. MAG’s share of project costs is currently being funded by 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. 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.

In 2017, MAG commissioned AMC Mining Consultants (Canada) Ltd. to prepare a Resource Estimate and Preliminary Economic Assessment for the Juanicipio Project (collectively, the “2017 PEA”), which was completed in accordance with NI 43-101 and announced by the Company on November 7, 2017, with the MAG Silver Juanicipio NI 43-101 Technical Report (Amended and Restated) filed on SEDAR and on EDGAR on January 19, 2018.&

The 2017 PEA incorporated major overall project upgrades over prior assessments, highlighted by the delineation and provision for mining of greatly expanded Indicated and Inferred Mineral Resources discovered in the Deep Zone, as defined in the 2017 PEA. The independent estimates of the Mineral Resources of the Juanicipio Project in the 2017 PEA were compiled using exploration data available up to December 31, 2016 and do not include the results of drilling programs undertaken since then (2017-2022) designed to further expand and infill the Deep Zone and define the upper limits of the Bonanza Zone (see Exploration – Juanicipio Project below). The volume of the base metal-rich Deep Zone Mineral Resources identified in the 2017 PEA contributed to a significant expansion of project scope and enhancements to most aspects of the mine design. Truck haulage, shaft hoisting, and underground conveying, along with underground crushing of the mineralized rock are all projected to be utilized for delivering the mineralized material to the surface processing plant. As envisioned in the 2017 PEA, the process plant has a planned production rate of 4,000 tpd, and will include a semi-autogenous grinding (“SAG”)/ball mill comminution circuit followed first by a gravity concentrator and then sequential selective flotation to produce a silver-rich lead concentrate, a zinc concentrate and a gold-rich pyrite concentrate. The plant and the associated tailings storage facilities have been built on open and flat Juanicipio-owned land just north of the conveyor ramp portal.

Based on the 2017 PEA, MAG views the Juanicipio Project as a robust, high-grade, high-margin underground silver project exhibiting low development risks. While the results of the 2017 PEA are promising, by definition, a Preliminary Economic Assessment is preliminary in nature and includes Inferred Mineral Resources that are considered too geologically speculative to have the economic considerations applied to them that would enable them to be categorized as Mineral Reserves. Mineral Resources that are not Mineral Reserves do not have demonstrated economic viability and there is no certainty that Mineral Resources will ever become Mineral Reserves. There can therefore be no certainty that the anticipated results of the 2017 PEA will be realized. In addition, the 2017 PEA was commissioned independently by MAG, and not by Juanicipio. The actual development plan and timeline may be materially different from the scope, design and results envisaged in the 2017 PEA (see Juanicipio Project and Risks and Uncertainties below).

Total Juanicipio Project expenditures incurred and capitalized by Juanicipio (on a 100% basis) for Q2 2022 amounted to approximately $37,998 (six months ended June 30, 2022: $71,574). Of the total expenditures $34,625 (six months ended June 30, 2022: $65,266) are development expenditures, $2,033 are exploration expenditures (six months ended June 30, 2022: $3,622), and the remaining $1,340 is capitalized shareholder loan interest (six months ended June 30, 2022: $2,686). Gross profit (sales less cost of sales including depreciation and amortization) from processing Juanicipio mineralized development and stope material at the Fresnillo plants for the three and six months ended June 30, 2022 totaled $37,262 and $83,483, respectively (three and six months ended June 30, 2021: $8,883 and $17,082, respectively) on a 100% basis (see ‘Underground Mine Production – Juanicipio Project’ below).

UNDERGROUND MINE PRODUCTION

Mineralized material from the Juanicipio Project is being campaign processed at the nearby Fresnillo and Saucito plants (both 100% owned by Fresnillo), with metals being refined and sold on commercial terms under the Juanicipio long term off-take agreements. During the quarter ended June 30, 2022, approximately 60% of the total tonnage processed was through the Saucito plant. The Saucito plant flowsheet better resembles that of the Juanicipio flowsheet and will provide further valuable metallurgical benefits as production commences at Juanicipio. The resulting concentrates are treated in Torreón, Coahuila, Mexico.

In the three months ended June 30, 2022, a total of 154,069 tonnes of mineralized development and stope material were processed through the Fresnillo plants. The resulting payable metals sold and processing details are summarized in the following table below. The sales and treatment charges for tonnes processed in Q2 2022 were recorded on a provisional basis and will be adjusted in Q3 2022 based on final assay and pricing adjustments in accordance with the offtake contracts.

Mineralized Material Processed at Fresnillo’s Processing Plants (100% basis)

Three Months Ended June 30, 2022 (154,069 tonnes processed) Q2 2021 Amount
$
Payable Metals Quantity Average Per Unit
$
Amount
$
Silver 2,207,626 ounces 21.32 per oz 47,070 10,991
Gold 5,119 ounces 1,834 per oz 9,388 1,320
Lead 1,016 tonnes 0.95 per lb. 2,135   290
Zinc 1,599 tonnes 1.76 per lb. 6,199   619
Treatment and refining charges (“TCRCs”) and other processing costs (9,568) (1,964)
Net Sales 55,224 11,256
Mining and transportation costs (12,717) (2,373)
Depreciation and amortization (5,245) (1) -
Gross Profit 37,262 8,883

(1) The underground mine is now in stopes with mineralized and development material being processed through Fresnillo’s plants and refined and sold, and effectively readied for its intended use.

In the six months ended June 30, 2022, a total of 299,553 tonnes of mineralized development and stope material were processed through the Fresnillo plants. The resulting payable metals sold and processing details are summarized in the following table below.

Mineralized Material Processed at Fresnillo’s Processing Plants (100% basis)

Six Months Ended June 30, 2022 (299,553 tonnes processed) Six Months
Ended June
30, 2021 Amount
$
Payable Metals Quantity Average Per Unit
$
Amount
$
Silver 4,446,436 ounces 23.16 per oz 102,969 22,148
Gold 10,464 ounces 1,881 per oz 19,678 2,410
Lead 2,082 tonnes 1.01 per lb. 4,619   557
Zinc 3,047 tonnes 1.77 per lb. 11,911   1,174
TCRCs and other processing costs (19,037) (3,802)
Provisional sales adjustment related to 2020 sales (1) - (1,146)
Net Sales 120,140 21,341
Mining and transportation costs (27,981) (4,259)
Depreciation and amortization (8,676) (2) -
Gross Profit 83,483 17,082

(1) Provisional sales for 2020 were finalized in Q1 2021 resulting in negative adjustment to net sales of $1,146.

(2) The underground mine is now in stopes with mineralized and development material being processed through Fresnillo’s plants and refined and sold, and effectively readied for its intended use.

The average silver head grade for the mineralized development and initial stope material processed in the three and six months ended June 30, 2022 was 567 g/t and 582 g/t (three and six months ended June 30, 2021 was 361 g/t and 405 g/t, respectively). This increased grade reflects more stoped vein material being processed. Metal recovery and concentrate grades are in line with expectations from the initial metallurgical test work conducted on Valdecañas.

The decrease in 2022 net sales quarter‐on‐quarter ($55,224 in the current quarter compared to $64,916 in the first quarter) was a function of a 15% reduction in realized blended metal prices as well as a 1% decrease in blended metal volumes driven predominantly by lower milled grades.

From August 2020 to June 30, 2022, a total of 623,319 tonnes of mineralized material have been processed 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 plant, MAG and Fresnillo expect to secure several positive outcomes for the Juanicipio Project:

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

PROCESSING PLANT CONSTRUCTION AND COMMISSIONING

The Juanicipio Project team delivered the 4,000 tpd processing plant for commissioning in the fourth quarter of 2021. However, according to the operator Fresnillo and as previously reported, the state-owned electrical company (Comision Federal de Electricidad “CFE”), notified Fresnillo late in December 2021 that the regulatory approval to complete the tie-in to the national power grid could not yet be granted and that the Juanicipio plant commissioning timeline was therefore extended by approximately six months. During the first half of 2022, Fresnillo has indicated that they were focused on complying with the requirements from the CFE and the energy regulator, and expected the tie-in to the power grid in mid-2022, with commissioning of the Juanicipio processing plant expected to commence concurrently. Good progress was made on the required power system shutdowns to enable the final tie-in of the Juanicipio sub-station to the national power grid. Commencement of electrical commissioning of the plant is expected to occur in the coming weeks. (see Outlook below).

In the interim, stoping and mine development at Juanicipio continues. In order to minimize any potential adverse economic effect of the revised commissioning timeline, Fresnillo has indicated it will continue to make available unused plant capacity at its Fresnillo and Saucito operations to process mineralized material produced at Juanicipio during this period. The effect on cash flow generation from Juanicipio has therefore been mitigated while the power connection approvals have been pending (and as noted above, expected to occur in the coming weeks).

UNDERGROUND DEVELOPMENT

Access to the mine is via twin underground declines that extend to the top of mineralization in the Valdecañas Vein. From the top of mineralization, the upper footwall haulage/access drift has been driven the length of the vein and three internal spiral production ramps are being extended from the drift to depth in the footwall of the mineralized envelope (vein). The three spiral ramps are situated behind the mineralized envelope to provide access to stopes within the vein and allow a planned mining rate of 4,000 tpd. Initial cross-cuts through the vein have been made from a number of points along the footwall ramps. Most expose well-mineralized vein and this initial development indicates that the grade and width of the mineralization is in line with previous drill core-based estimates. As discussed above, the mineralized material encountered in this underground development and from initial stopes, is being processed at the nearby Fresnillo owned processing plants (see Underground Mine Production above).

Once in full production, mineralized material from mining of the vein will be hauled to an underground crushing station (already excavated) and crushed underground. The crushed mineralized material will be trucked to the flotation plant until the conveyor is completed, which is expected to be in Q4 2022. When the conveyor is completed, the crushed mineralized material will be conveyed directly from the underground crushing station to the process plant area via a third ramp to the surface - the underground conveyor ramp. The conveyor ramp is over 90% complete and is being driven both from the surface and from the underground crushing chamber. This ramp will also provide access to the entire Valdecañas underground mining infrastructure and serve as a fresh air entry for the ventilation system. As well, the long-term mine ventilation system is nearing completion. The #1 and #2 ventilation shafts have been commissioned and ventilating some of the lower areas of the mine.

Total underground development to date is approximately 52km (32 miles), including 3.7 km (2.3 miles) completed during the three months ended June 30, 2022. 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 crushing system, underground warehouse, fuel storage and pumping station;
  • advancing the underground conveyor ramp to and from the surface processing facility from both faces; 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 will be the chosen mining method for the higher levels in this section. A trial longhole stope has 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.

Labour reform legislation on subcontracting and outsourcing in Mexico was published on April 23, 2021 and came into effect on September 1, 2021 (see Risks and Uncertainties below). With various restrictions on hiring contractors, Fresnillo, as operator, has indicated a need to internalize a significant portion of its contractor workforce and perform much of the development work directly rather than outsourcing it to contractors, and hence invest in equipment either not previously in the project scope or not envisaged to be required until later in the mine life, to be utilized in underground operations. As well, certain underground development expenditures related to processing development material and some small items brought forward from project investments planned in the future are considered sustaining capital by Fresnillo. The costs incurred are expected to reduce future sustaining capital costs and totaled approximately $7,601 on a 100% basis in the six months ended June 30, 2022. These costs are included in the current Juanicipio development costs but are not considered by the operator as part of the $440,000 initial project capital.

PROJECT CAPITAL (“CAPEX”)

The Juanicipio Project initial capital or pre-operative project capital cost (“capex”) on a 100% basis, as estimated from January 1, 2018, is expected to be $440,000 and according to the operator Fresnillo, the project construction is expected to be delivered on budget.

With the plant ready to commence commissioning once connected to the power grid (expected in the coming weeks– see ‘Processing Plant Construction – Juanicipio Project’ above), final construction costs are expected to wind down until final commissioning and testing commence. Meanwhile, the amount of mineralized development and stope material being processed at the two Fresnillo plants since Q4 2021 has been significantly higher than the original targeted rate of 16,000 tonnes per month. Mineralized material from initial stopes is now being processed as well. he expected cash flow from this ongoing campaign processing, along with the cash held by Juanicipio at June 30, 2022 of $37,504 on a 100% basis, are expected to fund the remaining capital expenditures in the $440,000 budget (a cash call has not been needed since mid-December 2021 which was $21,000 on a 100% basis). Should there be additional funding requirements related to further commissioning delays (see Risks and Uncertainties below) or for additional sustaining capital to be funded prior to attaining commercial production in excess of the cash flow generated, there may still be further cash calls required from Fresnillo and MAG (see Liquidity and Capital Resources below).

OUTLOOK

Fresnillo, as operator, reports that commissioning of the Juanicipio processing plant is expected to come in on budget and the plant is expected to ramp up to 85-90% of the nameplate 4,000 tpd capacity by the end of 2022. In contrast, the 2017 PEA originally envisioned ramp-up to full production over 3 years after commissioning of the processing plant. An Operator Services agreement has been finalized which will become effective upon the declaration of commercial production, whereby Fresnillo and its affiliates will continue to operate the mine. Until the Juanicipio processing plant is commissioned, mineralized development material and initial stope material from Juanicipio is being 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 off-take agreements with Met-Mex Peñoles, S.A. de C.V. (a Fresnillo affiliate) in Torreón, Mexico.

Fresnillo has engaged closely with the CFE and ‘El Centro Nacional de Control de Energía’ (“CENACE”) to do all that it can to expedite the necessary approvals and comply with requirements to complete the tie-in to the national power grid. The connection to the grid is the last step prior to initially feeding lower grade mineralized material through the grinding mills and mineralized material has been conveyed to the fine ore bin in preparation for this processing. Although there remains some uncertainty regarding the timing for the power connection (see Risks and Uncertainties below), according to Fresnillo, the connection to the power grid is expected in the coming weeks, with full load commissioning of the Juanicipio processing plant expected to commence immediately thereafter.

According to Fresnillo, the Juanicipio development is expected to create approximately 1,720 jobs once at full production, with potential to scale-up operations in the future beyond 4,000 tpd.

EXPLORATION – Juanicipio Project

Most of the Juanicipio 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.

2022 Exploration Program

The planned expenditures for the 2022 Exploration Program total $7,000 on a 100% basis, for drilling programs 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 in progress with 5 surface rigs as well as an additional underground rig. The drilling is focused on infilling the Valdecanas Vein System including Anticipada, Pre-Anticipada and the Venadas structures.

In mid-January 2022, drilling began on the first hole on the “Cesantoni Kaolinite Pits”(“Cesantoni”) target. Cesantoni lies in the northwestern corner of the Juanicipio 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 Cesantoni 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 NW-trending Valdecañas Vein. The extent of kaolinite-illite alteration at Cesantoni is much greater than that seen elsewhere in the district and may indicate passage of very large volumes of hydrothermal fluids. The top of anticipated mineralization at Cesantoni is expected to occur at depths similar to those elsewhere in the Juanicipio concession (350 to 500 m below the surface).

Initial planning as laid out by project operator, Fresnillo, is to drill 5 core holes totaling 6,000 m. Drilling is being done with a highly portable rig to minimize surface disturbance. The program is progressing well and the Company expects to release assays once the program is concluded and requisite QAQC has been finalized.

2021 Exploration Program

The 2021 Juanicipio exploration program was completed with a spend of $6,296 on a 100% basis and was focused on continued step-out and infill drilling of the Valdecañas Vein System (including independent targeting of the Venadas Vein family and the Anticipada Vein). Drilling for the program began in January 2021 with four drill rigs and a fifth drill rig was added mid-year. Three of the drill rigs were dedicated to Devico directional drilling. In total, 23 surface-based drill holes (targets) were successfully completed with 21 being deep infill or step-out holes on the Valdecañas Vein System and two exploration holes on other parts of the Juanicipio concession, resulting in 29,421 m drilled. The two exploration holes away from Valdecañas were drilled in a northeastern corner of the concession and both intercepted narrow veins with high grade silver and gold and no base metals suggesting these intercepts are high in the system.

2021 Valdecañas Drilling Results

The Company’s interpretation of the 2021 Valdecañas drill results is below, with a complete set of assay tables by vein of the 2021 drilling results available at: https://magsilver.com/site/assets/files/6439/mda_mj_exploration-supplemental-assay-tables.pdf  along with various long sections detailing the results, available at: https://magsilver.com/geological-long-sections/.

Most of the holes in the 2021 exploration program were directed at the Valdecañas Vein Deep Zone, with 13 coincidental intercepts of the Anticipada and 8 more for Pre-Anticipada, and various other hangingwall and footwall veins (see above noted links). Four holes cut the Venadas Vein Family and two holes were directed at a postulated vein lying to the northwest of the Valdecañas Vein System in the northeast corner of the concession. Most intercepts are comparable to previously drilled neighbouring holes with no major deviations either towards higher or lower grades or thicknesses. With the completion of the 2021 drilling program, the intercept density on the Valdecañas Vein Deep Zone is approaching that on the Bonanza Zone and confirms the continuity of mineralization in the Valdecañas Vein to depth.

The driving of development headings and test stopes in the Valdecañas Vein Bonanza Zone has been accompanied by channel sampling across the vein every 3 to 10 m. Samples are mostly 1 m in length and honour geology as much as possible. Importantly, the results of this detailed sampling show that the grade distribution in the vein is very close to that shown by both the initial 50 m – 70 m spaced surface-based drilling and the 25m spaced underground drilling, which adds substantial confidence in the width and grade continuity indicated by the surface drilling for the balance of the vein.

Quality Assurance and Control: The samples (half core) are shipped directly in security-sealed bags to ALS-Chemex Laboratories preparation facility in Guadalajara, Jalisco, Mexico (Certification ISO 9001). Samples shipped also include intermittent standards and blanks. Pulp samples are subsequently shipped to ALS-Chemex Laboratories in North Vancouver, British Columbia, Canada for analysis. Two extra pulp samples are also prepared and are analyzed (in progress) by SGS Laboratories (Certification ISO 9001) and Inspectorate Laboratories (Certification ISO 9001) (or another recognized lab). The remaining half core is placed back into the core boxes and is stored on site with the rest of the drill hole core in a secured core storage facility. The bulk reject is subsequently sent to the Center for Investigation and Technical Development (“CIDT”) of Peñoles in Torreon, Coahuila State, Mexico for metallurgical testing where a fourth assay for each sample is analyzed and a calculated head grade is received on the basis of a concentrate balance. The CIDT also does a full microscopic, XRF and XRD mineralogical analysis.

COVID-19 – Juanicipio Project

The Juanicipio Project operator, Fresnillo, continues to closely monitor the spread of the COVID-19 virus and has implemented a range of safety measures in accordance with the World Health Organization and Mexican Government guidelines.

As previously reported, the consequences of COVID-19 have had an impact on the commissioning timetable for the Juanicipio processing plant which is currently expected to commence commissioning in the coming weeks. Further impacts of this pandemic could create or include significant COVID-19 specific costs, further delays in plant commissioning, volatility in the prices for silver and other metals, further restrictions or temporary closures, additional travel restraints, supply chain disruptions and workforce interruptions, including loss of life. Depending on the duration and extent of the impact of COVID-19, this could materially impact the Company’s financial performance, cash flows and financial position, and could result in material changes to the costs and time for the completion of development at Juanicipio. The total amount that the Company is required to finance in order to maintain its proportionate ownership in the project may increase from these and other consequences of the COVID-19 outbreak. See ‘Virus outbreaks may create instability in world markets and may affect the Company’s Business’ in ‘Risk and Uncertainties’ below.

HIGHLIGHTS – JUNE 30, 2022 SUBSEQUENT TO THE QUARTER END

OPERATIONAL (on a 100% basis unless otherwise noted)

For the three months ended June 30, 2022:

  • A record 154,069 tonnes of mineralized development and stope material were campaign processed through the Fresnillo and Saucito plants, with 2,207,626 payable silver ounces, 5,119 payable gold ounces, 1,016 payable lead tonnes and 1,599 payable zinc tonnes produced and sold;
  • Average silver head grade for the quarter was 567 grams per tonne (“g/t”); and
  • Pre-commercial production sales (net of treatment and processing costs) totaled $55,224 for the quarter, less $17,962 in mining and transportation costs and depreciation and amortization charges, netting $37,262 in gross profit by Juanicipio.

For the six months ended June 30, 2022:

  • 299,553 tonnes of mineralized development and stope material were campaign processed through the Fresnillo and Saucito plants, with 4,446,436 payable silver ounces, 10,464 payable gold ounces, 2,082 payable lead tonnes and 3,047 payable zinc tonnes produced and sold;
  • Average silver head grade for the six months was 581 g/t; and
  • Pre-commercial production sales (net of treatment and processing costs) totaled $120,140, less $36,657 in mining and transportation costs and depreciation and amortization, netting $83,483 in gross profit by Juanicipio.

At the end of the quarter, Juanicipio held cash balances of $37,504 up from $18,261 at the end of Q1.

As reported by the operator Fresnillo, commencement of electrical commissioning of the Juanicipio processing plant is expected to occur in the coming weeks.

Fresnillo is making available unused processing plant capacity at its nearby Fresnillo and Saucito operations. Campaign processing of mineralized material from development headings and stopes at Juanicipio continues through these nearby facilities and is expected to continue until the Juanicipio plant is commissioned.

Campaign processing benefits include the cash flow being used to offset some of the initial and sustaining capital and the de-risking of Juanicipio’s metallurgical performance, which is expected to significantly speed up project ramp-up.

Approximately 60% of the tonnes in the second quarter 2022 were processed at Fresnillo’s Saucito plant, where the flowsheet more closely resembles that of the Juanicipio plant. It is expected these results will provide further valuable metallurgical benefits when milling production commences at Juanicipio.

Metal recovery and concentrate grades are in line with expectations from the initial metallurgical test work conducted on Valdecañas.

CORPORATE

MAG reported net income of $7,562 or 0.08 per share for the three months ended June 30, 2022.

During the quarter, MAG concluded the previously announced acquisition of Gatling Exploration Inc. (“Gatling”) by way of a court approved plan of arrangement (the “Transaction”). MAG acquired all of the issued and outstanding common shares of Gatling by the issuance of common shares of the Company and in connection with the Transaction, provided an advancement of a C$3 million convertible note. Gatling’s Larder Project lies in the highly prolific Abitibi Gold Province of northern Ontario, with good surrounding infrastructure and already permitted drill pads to test initial targets.

EXPLORATION

The Juanicipio 2021 exploration program was completed in Q4 2021 with $6,296 spent on a 100% basis and was focused on continued step-out and infill drilling of the Valdecañas Vein System (including independent targeting of the Venadas Vein family and the Anticipada Vein).

Results of the Juanicipio 2021 exploration program (23 surface-based drill holes totaling 29,421 metres (“m”)) were reported on May 13, 2022, and highlights include:

  • 21 holes cut the Valdecañas Vein System, with most directed at the Valdecañas Vein Deep Zone plus coincidental intercepts of the Anticipada (13), Pre-Anticipada (8) and various other hangingwall and footwall veins;
  • Most intercepts are comparable to previously drilled neighboring holes with no major deviations from grade and thickness expectations; and,
  • Channel sampling of the advancing development headings and test stopes in the Valdecañas Vein Bonanza Zone shows that the grade distribution in the vein is very close to that shown by both surface and underground drilling, which adds substantial confidence in the width and grade continuity indicated by the surface drilling for the balance of the vein.

With the completion of the 2021 exploration drill program, the intercept density on the Valdecañas Vein Deep Zone is now approaching that on the Bonanza Zone and confirms the continuity of mineralization in the Valdecañas Vein to depth.

The Juanicipio 2022 exploration program is currently in process ($3,622 expended on a 100% basis for the six months ended June 30, 2022) with five drill rigs on surface running concurrently with continued underground definition and geotechnical drilling, and one rig testing the new Cesantoni (as defined herein) target in the northwest part of the Juanicipio concession.

Deer Trail Project in Utah:

  • A 5 hole/5,000 m Phase II drill program commenced in Q3 2021 and is in process with one drill and all assays pending.

MAG has initiated a drilling campaign on the acquired Larder Project. In addition to a comprehensive data review, a drilling program is contemplated to drill below and lateral to the already identified mineralization.

During the six months ended June 30, 2022, the Company recorded a write down of $10,471 on its option earn-in project on a prospective land claim package in the Black Hills of South Dakota.

LIQUIDITY AND CAPITAL RESOURCES (on a 100% basis unless otherwise noted)

As at June 30, 2022, MAG held cash of $44,655 and Juanicipio had cash on hand of $37,504.

According to the operator Fresnillo, the Juanicipio Project (as defined herein) construction is expected to be delivered on budget of $440,000.

With the current ramp up of underground mine production and given hiring restrictions on contractors arising from Mexico’s 2021 labour reform legislation, the timing of various sustaining capital expenditures has been brought forward:

  • These sustaining capital expenditures are included in current Juanicipio development costs but are not considered by the operator as part of the $440,000 initial project capital; and
  • The costs incurred are expected to reduce future sustaining capital costs and totaled approximately $2,789 in the quarter ended June 30, 2022 (six months ended June 30, 2022: $7,601).

The expected cash flow from the ongoing campaign processing until the Juanicipio plant is commissioned, along with the cash held by Juanicipio at June 30, 2022 are projected to substantially fund the remaining capital expenditures in the $440,000 initial capex (a cash call has not been needed since mid-December 2021 which was $21,000 on a 100% basis).

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Fresnillo Annual Report 2020

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Story of Juanicipio

It all began with gas station…

Story of Juanicipio

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Juanicipio

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