MAG Silver (MAG) - 2022 Q3 - Quarterly Report

Condensed Interim Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) Income (Loss) and Comprehensive Income (Loss) Summary MAG Silver Corp. experienced a significant turnaround from a loss to income for the three and nine months ended September 30, 2022, primarily driven by a substantial increase in income from its equity-accounted investment in Juanicipio Income (Loss) and Comprehensive Income (Loss) Highlights (in thousands of US dollars): | Metric | Three months ended Sep 30, 2022 | Three months ended Sep 30, 2021 | Nine months ended Sep 30, 2022 | Nine months ended Sep 30, 2021 | | :------------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Income from equity accounted investment in Juanicipio | 11,781 | 1,457 | 37,890 | 6,909 | | Operating income (loss) | 8,758 | (789) | 18,753 | (1,179) | | Income (loss) for the period | 8,227 | (2,280) | 18,469 | (2,637) | | Basic and diluted earnings (loss) per share | 0.08 | (0.02) | 0.19 | (0.03) | Condensed Interim Consolidated Statements of Financial Position Financial Position Summary The company's financial position strengthened as of September 30, 2022, with total assets increasing, largely due to a growing investment in Juanicipio, and a corresponding rise in total equity Financial Position Highlights (in thousands of US dollars): | Metric | Sep 30, 2022 | Dec 31, 2021 | | :-------------------------- | :----------- | :----------- | | Total assets | 405,594 | 372,372 | | Investment in Juanicipio | 327,894 | 291,084 | | Total liabilities | 5,029 | 4,851 | | Total equity | 400,565 | 367,521 | | Cash | 39,507 | 56,748 | Condensed Interim Consolidated Statements of Cash Flows Cash Flow Summary Cash decreased during the nine months ended September 30, 2022, primarily due to investing activities, despite a slight reduction in cash used in operating activities compared to the prior year Cash Flow Highlights (in thousands of US dollars): | Metric | Three months ended Sep 30, 2022 | Three months ended Sep 30, 2021 | Nine months ended Sep 30, 2022 | Nine months ended Sep 30, 2021 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net cash used in operating activities | (1,262) | (1,274) | (7,956) | (5,094) | | Net cash used in investing activities | (3,661) | (33,291) | (9,245) | (57,671) | | Net cash used in financing activities | (28) | (24) | (49) | 127 | | Decrease in cash during the period | (5,148) | (34,635) | (17,241) | (62,301) | | Cash, end of period | 39,507 | 31,707 | 39,507 | 31,707 | Condensed Interim Consolidated Statements of Changes in Equity Equity Changes Summary Total equity increased significantly for the nine months ended September 30, 2022, driven by share issuances related to the Gatling Exploration acquisition and a positive income for the period, contrasting with a loss in the prior year Changes in Equity Highlights (in thousands of US dollars, except shares): | Metric | Sep 30, 2022 | Dec 31, 2021 | Sep 30, 2021 | | :------------------------------------------ | :----------- | :----------- | :----------- | | Balance, beginning of period (Jan 1, 2021) | - | 316,668 | 316,668 | | Shares issued on acquisition of Gatling Exploration | 11,212 | - | - | | Income (loss) for the period | 18,469 | 6,025 | (2,637) | | Balance, end of period | 400,565 | 367,521 | 313,360 | | Common shares outstanding (Sep 30, 2022) | 98,771,298 | 97,809,441 | 95,028,926 | - Issued 774,643 common shares valued at $11,212k for the acquisition of Gatling Exploration during the nine months ended September 30, 2022[6] Notes to the Condensed Interim Consolidated Financial Statements Note 1. Nature of Operations MAG Silver Corp. is a Canadian development and exploration company focused on high-grade silver projects in the Americas, with its primary asset being a 44% interest in the Juanicipio Project in Mexico, which is nearing electrical commissioning. The company's operations are subject to commodity and labor cost fluctuations - MAG Silver Corp. is a Canadian development and exploration company focused on high-grade, district scale precious metals projects in the Americas[9] - The Company's principal asset is a 44% interest in the Juanicipio Project in Zacatecas, Mexico, with a 4,000 tonnes per day processing plant expected to commence electrical commissioning in Q4 2022[9] - Operating costs are affected by commodity prices (explosives, fuel, electrical power, supplies) and labor availability, which can be influenced by inflation, supply chain disruptions, and geopolitical events[10] Note 2. Summary of Significant Accounting Policies The interim financial statements are prepared under IAS 34 and IFRS, consistent with prior annual statements, with the adoption of a new accounting policy for asset acquisitions. Management believes estimates and assumptions are reasonable, and recent global events did not materially impact them - Condensed interim consolidated financial statements are prepared under International Accounting Standards 34 (IAS 34) in accordance with International Financial Reporting Standards (IFRS)[12] - A new accounting policy for asset acquisition was adopted, where the cost of acquired assets and liabilities is allocated based on their relative fair values[14] - Management determined that recent global events, including pandemic outbreaks and the Russia-Ukraine conflict, did not have a material impact on significant judgments and estimates in these financial statements[17] Note 3. Acquisition of Gatling Exploration On May 20, 2022, MAG Silver acquired Gatling Exploration Inc., including the Larder Project, through an asset acquisition. The transaction involved issuing common shares and replacement options/warrants, with a total consideration of $14,039k and net assets acquired of the same amount - On May 20, 2022, MAG Silver Corp. completed the acquisition of Gatling Exploration Inc. and its 100% interest in the Larder Project[19] - The transaction was accounted for as an asset acquisition, not a business combination, under IFRS 3[20] Fair Value of Consideration Paid (in thousands of US dollars): | Item | Value ($) | | :-------------------------------- | :-------- | | Value of shares on close of Transaction | 11,212 | | Value of convertible note receivable | 2,392 | | Value of replacement options and warrants | 85 | | Transaction costs | 350 | | Total consideration paid | 14,039 | Fair Value of Identified Assets Acquired and Liabilities Assumed (in thousands of US dollars): | Item | Value ($) | | :-------------------------------- | :-------- | | Cash and cash equivalents | 89 | | Receivables, prepaids and deposits | 115 | | Exploration and evaluation assets | 15,187 | | Accounts payable and accrued liabilities | (1,315) | | Lease liabilities | (37) | | Net assets acquired | 14,039 | Note 4. General and Administrative Expenses General and administrative expenses increased for both the three and nine months ended September 30, 2022, compared to 2021, primarily driven by higher management compensation, consulting fees, insurance, and share-based payment expenses General and Administrative Expenses (in thousands of US dollars): | Expense Category | Three months ended Sep 30, 2022 | Three months ended Sep 30, 2021 | Nine months ended Sep 30, 2022 | Nine months ended Sep 30, 2021 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Management compensation and consulting fees | 957 | 633 | 2,980 | 1,952 | | Share-based payment expense | 1,113 | 896 | 2,318 | 3,574 | | Insurance | 530 | 351 | 1,483 | 960 | | Total G&A Expenses | 3,003 | 2,212 | 8,555 | 8,014 | Note 5. Cash The company's cash consists of cash on hand and callable bank deposits - The Company's cash consists of cash on hand and callable bank deposits[25] Note 6. Accounts Receivable Accounts receivable increased from $2,097k at December 31, 2021, to $3,122k at September 30, 2022, primarily due to a rise in receivables from Minera Juanicipio and value-added tax Accounts Receivable (in thousands of US dollars): | Category | Sep 30, 2022 | Dec 31, 2021 | | :-------------------------------- | :----------- | :----------- | | Receivable from Minera Juanicipio | 2,840 | 1,944 | | Value added tax ("IVA" and "GST") | 279 | 152 | | Other receivables | 3 | 1 | | Total Accounts Receivable | 3,122 | 2,097 | Note 7. Investments The company's equity securities investments significantly decreased from $1,179k at the beginning of the nine-month period to $8k by September 30, 2022, due to dispositions and unrealized losses Continuity of Investments in Equity Securities (in thousands of US dollars): | Metric | Sep 30, 2022 | Sep 30, 2021 | | :-------------------------------- | :----------- | :----------- | | Equity securities, beginning of period | 1,179 | 11,951 | | Disposition of equity securities at fair value | (1,111) | (3,457) | | Unrealized loss for the period | (60) | (5,248) | | Equity securities, end of period | 8 | 3,246 | - A gain on disposal of $964k (net of tax) was recognized and transferred from other comprehensive income to deficit during the nine months ended September 30, 2022[28] Note 8. Investment in Juanicipio MAG Silver holds a 44% interest in the Juanicipio Project, a joint venture with Fresnillo, with the investment value increasing to $327,894k by September 30, 2022, driven by MAG's share of Juanicipio's net income. The project is nearing electrical commissioning, and depreciation on mining assets has commenced. Juanicipio reported significant increases in sales and gross profit for the period - Minera Juanicipio and Equipos Chaparral (collectively 'Juanicipio') are held 56% by Fresnillo and 44% by MAG Silver Corp[29] - The Company records its Investment in Juanicipio using the equity method of accounting[32] Investment in Juanicipio (in thousands of US dollars): | Metric | Sep 30, 2022 | Dec 31, 2021 | | :------------------------------------------ | :----------- | :----------- | | Balance, beginning of period | 291,084 | 202,570 | | Income from equity accounted Investment in Juanicipio (9 months) | 37,890 | 15,686 | | Balance, end of period | 327,894 | 291,084 | - Electrical commissioning of the Juanicipio Project is expected in the coming weeks, with the underground mine processing mineralized material through Fresnillo's plants since January 2022[39] Juanicipio Statements of Income (100% basis, in thousands of US dollars): | Metric | Three months ended Sep 30, 2022 | Three months ended Sep 30, 2021 | Nine months ended Sep 30, 2022 | Nine months ended Sep 30, 2021 | | :-------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Sales | 49,715 | 14,684 | 169,855 | 36,025 | | Gross profit | 25,212 | 11,207 | 108,695 | 28,289 | | Income for the period | 26,365 | 3,312 | 85,004 | 15,703 | | MAG's 44% equity income | 11,781 | 1,457 | 37,890 | 6,909 | Note 9. Exploration and Evaluation Assets The company's exploration and evaluation assets include the Deer Trail project and the newly acquired Larder Project. During the nine months ended September 30, 2022, the Black Hills property was written down by $10,471k due to permitting challenges, while significant expenditures were incurred on Deer Trail and Larder - The Company has the right to earn 100% ownership in the Deer Trail project, with cumulative eligible exploration expenditures of $16,296k incurred as of September 30, 2022, towards a $30,000k commitment by 2028[41] - The Larder Project in Ontario was acquired 100% during the nine months ended September 30, 2022 (see Note 3)[42] - The Black Hills property's full carrying amount of $10,471k was written down during the nine months ended September 30, 2022, due to significant challenges in permitting for exploration drilling[43] Exploration and Evaluation Expenditures (in thousands of US dollars, nine months ended Sep 30, 2022): | Project | Total for the period | | :---------------- | :------------------- | | Deer Trail | 6,821 | | Larder Project | 16,384 | | Black Hills | 191 | Note 10. Property and Equipment The carrying amount of property and equipment decreased slightly to $395k at September 30, 2022, from $484k at December 31, 2021, primarily due to depreciation. Lease obligations also decreased, with interest expense recognized Carrying Amounts of Property and Equipment (in thousands of US dollars): | Category | At December 31, 2021 | At September 30, 2022 | | :-------------------------- | :------------------- | :-------------------- | | Office and computer equipment | 21 | 17 | | Exploration camp and equipment | 258 | 263 | | Right of use asset | 205 | 115 | | Total | 484 | 395 | Lease Obligation (in thousands of US dollars): | Metric | Sep 30, 2022 | Dec 31, 2021 | | :------------------------------------------ | :----------- | :----------- | | Present value of minimum lease payments - total lease obligation | 286 | 385 | | Long-term lease obligation | 170 | 275 | - The Company recognized $33k in interest expense on the lease obligation for the nine months ended September 30, 2022[48] Note 11. Share Capital The company's share capital increased due to the issuance of common shares for the Gatling acquisition, exercise of stock options, and conversion of restricted, performance, and deferred share units. The number of outstanding stock options and share units, along with their associated share-based payment expenses, are detailed Weighted Average Shares Outstanding: | Metric | Three months ended Sep 30, 2022 | Three months ended Sep 30, 2021 | Nine months ended Sep 30, 2022 | Nine months ended Sep 30, 2021 | | :------------------------------------------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Basic weighted average number of shares outstanding | 98,732,615 | 95,002,815 | 98,266,916 | 94,906,327 | | Diluted weighted average number of shares outstanding | 98,914,359 | 95,002,815 | 98,507,559 | 94,906,327 | - As at September 30, 2022, there were 98,771,298 common shares outstanding[52] - During the nine months ended September 30, 2022, 774,643 common shares were issued to acquire Gatling Exploration, and 63,492 common shares were issued to settle Gatling executive management liability[54] Share-based Payment Expense (in thousands of US dollars, nine months ended Sep 30, 2022): | Category | Expense | | :-------------------------- | :------ | | Stock options | 1,065 | | Restricted and performance share units | 990 | | Deferred share units | 299 | | Total | 2,354 | - As at September 30, 2022, 1,154,912 stock options (excluding Gatling replacement options) were outstanding with a weighted average exercise price of C$17.27[57] - 53,525 replacement warrants were issued pursuant to the Gatling acquisition, with a weighted average remaining contractual life of 0.41 years as of September 30, 2022[75] Note 12. Capital Risk Management The company manages its capital structure to ensure ongoing operations and meet strategic objectives, consisting of equity and lease obligations, net of cash and investments. It maintains working capital of $42,434k and is finalizing a $40,000k revolving credit facility, with no long-term debt or externally imposed capital requirements - The capital structure consists of equity (share capital, equity reserve, accumulated other comprehensive income (loss), and deficit) and lease obligation, net of cash and investments[76] - Working capital as at September 30, 2022, was $42,434k[78] - The Company has no long-term debt and is not subject to any externally imposed capital requirements as of September 30, 2022[79] - A fully underwritten $40,000k revolving credit facility is being finalized[79] Note 13. Financial Risk Management The company is exposed to various financial risks, including market risk (commodity prices for silver, gold, lead, zinc), credit risk (primarily from Juanicipio's sales to Met-Mex Peñoles and Mexican VAT receivables), liquidity risk, currency risk (Mexican peso and Canadian dollar fluctuations), and political/country risk in its operating regions - Juanicipio is exposed to commodity price risk (silver, gold, lead, zinc) and does not hedge these commodities[81] - Credit risk is managed by investing in highly rated investment grade instruments and maintaining minimal cash in US and Mexican subsidiaries. Juanicipio's sales to Met-Mex Peñoles (a related party to Fresnillo) are considered to have low trade credit risk[83][84] Maximum Exposure to Credit Risk (in thousands of US dollars): | Metric | Sep 30, 2022 | Dec 31, 2021 | | :------------------------------------------ | :----------- | :----------- | | Cash | 39,507 | 56,748 | | Accounts receivable | 3,122 | 2,097 | | Loan to the Juanicipio Entities | 96,513 | 106,036 | | Total | 139,142 | 164,881 | - The Company is exposed to currency risk from fluctuations in the Mexican peso and Canadian dollar relative to the US$, but does not use derivative instruments to reduce this exposure[90] - A 10% appreciation in the Mexican peso against the US$ would result in a $1,583k loss before tax in Juanicipio, with MAG's 44% share being a $696k loss from equity investment[95] - Operations in Canada, the United States, and Mexico expose the Company to political and country risks, including royalties, tax increases, expropriation, and environmental regulations[100] Note 14. Financial Instruments and Fair Value Disclosures The company's financial instruments include cash, accounts receivable, investments, trade and other payables, and lease obligations, with carrying values approximating fair values for short-term instruments. Investments in equity securities are classified as Level 1 in the fair value hierarchy - The Company's financial instruments include cash, accounts receivable, investments, trade and other payables, and lease obligation, with carrying values approximating fair values due to their short-term nature[103] Financial Assets Measured at Fair Value (in thousands of US dollars): | Item | Sep 30, 2022 (Level 1) | Dec 31, 2021 (Level 1) | | :---------------- | :--------------------- | :--------------------- | | Investments | 8 | 1,179 | - Investments in equity securities are classified within Level 1 of the fair value hierarchy, based on unadjusted quoted prices in active markets[105] Note 15. Segmented Information The company operates in one primary segment: the exploration and development of mineral properties in North America, with its main asset (Juanicipio Project) in Mexico and its head office in Canada - The Company operates primarily in one operating segment: the exploration and development of mineral properties in North America[108] - The principal asset, the Juanicipio Project, is located in Mexico, and the Company's executive and head office is in Canada[108] Note 16. Related Party Transactions The company engages in related party transactions, including administrative and exploration services from Cascabel and IMDEX (where Dr. Peter Megaw is a principal), and its joint venture with Fresnillo in Juanicipio. Key management personnel compensation includes salaries and share-based payments - The Company contracts administrative and exploration services in Mexico with Minera Cascabel S.A. de C.V. ('Cascabel') and IMDEX Inc. ('IMDEX'), where Dr. Peter Megaw, Chief Exploration Officer, is a principal[109] Expenses with Cascabel and IMDEX (in thousands of US dollars): | Category | Three months ended Sep 30, 2022 | Three months ended Sep 30, 2021 | Nine months ended Sep 30, 2022 | Nine months ended Sep 30, 2021 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Fees related to Dr. Megaw | 120 | 84 | 267 | 238 | | Other fees to Cascabel and IMDEX | 51 | 55 | 166 | 168 | | Total | 171 | 139 | 433 | 406 | - Juanicipio is held 56% by Fresnillo plc and 44% by the Company, with Fresnillo beneficially owning 9.96% of MAG's common shares[116] Compensation of Key Management Personnel (in thousands of US dollars, nine months ended Sep 30): | Category | 2022 | 2021 | | :------------------------------------------ | :--- | :--- | | Salaries and other short term employee benefits | 1,217 | 973 | | Share-based payments | 1,174 | 2,403 | | Total | 2,391 | 3,376 | Note 17. Commitments and Contingencies The company has consulting contract commitments totaling $576k. While cash advances to Juanicipio are not contractual obligations, MAG intends to continue funding its share. Juanicipio has significant contractual commitments and purchase orders for project development and operations. The company also has discretionary property option payments and exploration expenditure commitments and is not aware of any material legal or tax proceedings Contractual Obligations (in thousands of US dollars, as at Sep 30, 2022): | Category | Total | Less than 1 year | 1-3 Years | 3-5 Years | More than 5 years | | :-------------------------------- | :---- | :--------------- | :-------- | :-------- | :---------------- | | Consulting contract commitments | 576 | 297 | 205 | 74 | - | - The Company intends to continue funding its share of cash calls to Juanicipio to avoid dilution of its ownership interest, although these are not contractual obligations[121] - Juanicipio has contractual commitments of $38,587k and purchase orders of $30,112k for project development and operations as at September 30, 2022 (100% basis)[122] - The Company has discretionary commitments for property option payments and exploration expenditures, which it evaluates and decides upon at its own discretion[125] - The Company is not aware of any material investigations, claims, or legal and tax proceedings that would result in a material impact on its financial position or results of operations[126]