Proposed acquisition of MAG Silver
On 11 May PAAS announced a proposed acquisition of MAG in a cash and shares transaction
that values the company at US$2.1bn (US$1.9bn based on the current PAAS share price).
The company expects to issue c 60m new shares and pay US$500m in cash for MAG. The
transaction requires approval by the MAG shareholders at a special meeting expected
to take place in July (66 2/3% of the votes cast). Following the completion, PAAS
estimates that MAG shareholders will own c 14% of the combined company on a fully
diluted basis. MAG board directors and management entered into a voting support agreement
with PAAS. The transaction is expected to close in H225.
MAG’s main asset is its 44% interest in the large-scale, low-cost Juanicipio silver/gold
operation in Zacatecas (Fresnillo district), Mexico. The project started commercial
production in 2023 and is operated by the world’s largest primary silver producer,
Fresnillo, which owns the remaining 56%. In 2024, Juanicipio produced 18.6Moz of silver
(at a head grade of 468g/t) and 39koz of gold, generating US$627m in net revenues
and US$449m in EBITDA on a 100% basis. Production attributable to MAG was 8.2Moz for
silver and 17koz for gold, representing c 40% and 2% of PAAS production respectively.
On a pro-forma, attributable basis this implies PAAS 2024 silver output of 29Moz (9.5Moz
for Q125 vs 5.0Moz for PAAS standalone). Juanicipio is a low-cost operation with silver
cash cost and AISC of US$0.9/oz and US$5.5/oz in 2024 compared to US$13.3/oz and US$18.7/oz
for PAAS, respectively.
For 2025, Fresnillo/MAG guide Juanicipio silver production of 14.7–16.7Moz (6.5–7.3Moz
attributable) at a silver cash cost of US$(1.0)–1.0/oz and AISC of US$6.0–8.0/oz.
This compares to PAAS’s FY25 guidance of 20.0–21.0Moz in silver production at a silver
segment AISC of US$16.3–18.3/oz and implies pro forma, annualised silver production
of 27.4Moz and a silver segment AISC of US$14.0/oz (at mid-point of guidance). Juanicipio
has a large resource base (18.9Mt in M&I resources at 288g/t Ag inclusive of mineral
reserves) and a 10-year mine life, which is likely to be extended given that only
about 10% of the 7,679ha property has so far been explored.
Due to its low-cost nature Juanicipio is a highly cash generative business. In 2024,
it generated US$357m in operating cash flow, with US$63m spent on capex/exploration
and US$282m paid back to project owners as part of the shareholder loan repayment
and dividends. MAG received US$124m from Juanicipio in 2024 and an additional US$62m
in April 2025. Consensus for MAG suggests an equity contribution from Juanicipio of
US$124m in FY25 (implied project net profit of US$282m). However, market expectations
for cash flows do not look reliable to us and the project’s FCF of US$200m suggested
by PAAS/MAG appears to be conservative (Q125 FCF of US$79m). For the valuation purposes
we, therefore, consider FY24 multiples, with the current transaction EV of US$1.7bn
pointing to an implied EV/FCF of 14.4x (based on MAG FY24 FCF adjusted for exploration
spend on Deer Trail and Larder projects) compared to PAAS’s multiple of 24.9x (see
Exhibit 3). On our updated estimates, PAAS trades at an FY25e EV/FCF of c 14.0x (Edison
FY25e FCF of US$710m (OCF of US$1,080m less capex of US$369m) versus consensus of
US$696m (OCF of US$1,050m less capex of US$362m)).
Overall, our initial take on the transaction is positive for PAAS. Juanicipio is the
largest scale and lowest cost primary silver operation globally of a similar calibre
to Escobal (21.2Moz of silver production at a head grade of 477g/t in 2016; 16.5Mt
in M&I resources at 208g/t Ag, plus reserves of 24.7Mt at 334g/t Ag; processing capacity
of 4,500tpd vs 4,000tpd for Juanicipio). The acquisition will allow the company to
partly rebalance its asset portfolio towards silver, with primary silver producers
trading at premium valuations to pure gold companies, boost attributable silver production
with lower operating risks and, more importantly, its cash flows. It will also strengthen
PAAS’s position as the second largest global primary silver producer after Fresnillo.
Given the company’s strong track record of well-timed acquisitions (Tahoe/Yamana),
the deal might suggest a structural shift away from gold to silver and potentially
indicate a more protracted Escobal restart process. At US$4.2bn undisturbed MAG/Juanicipio
valuation, the acquisition also provides a useful read-across for Escobal, which on
our updated numbers contributes c US$3.8bn to PAAS’s overall DCF-based valuation.
