UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 6-K

 


Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16
under the Securities Exchange Act of 1934

 

For: May 15, 2020

MAG Silver Corp.

(SEC File No. 0-50437)

 

#770 – 800 West Pender Street, Vancouver BC, V6C 2V6, CANADA

Address of Principal Executive Office

 

The registrant files annual reports under cover: Form 20-F ☐ Form 40-F ☒

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by
Regulation S-T Rule 101(b)(1):  

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by
Regulation S-T Rule 101(b)(7):  

 

Indicate by check mark whether by furnishing the information contained in this Form, the
registrant is also thereby furnishing the information to the Commission pursuant to Rule
12g3-2(b) under the Securities Exchange Act of 1934: Yes ☐ No ☒

 

If “Yes” is marked, indicate below the file number assigned to the registrant in

connection with Rule 12g3-2(b): 82-

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly

caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

 

 

Exhibits
99.1 Unaudited Condensed Interim Consolidated Financial Statements for period ending March 31, 2020
99.2 Management Discussion and Analysis for period ending March 31, 2020
99.3 Form 52-109F2 CEO Certification of Interim Filings
99.4 Form 52-109F2 CFO Certification of Interim Filings

 

 

 

 

 

 

 

 

 

 

     
Date:    May 15, 2020   MAG Silver Corp.  
    “George Paspalas”  
    GEORGE PASPALAS  
    President & CEO  
                         

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit 99.1

 

 

 

 

 

 

 

 

MAG Silver Corp.

 

Unaudited Condensed Interim Consolidated Financial Statements (expressed in thousands of US dollars)

 

For the three months ended March 31, 2020 and 2019

 

Dated: May 15, 2020

 

 

 

 

 

 

 

 

 

 

 

 

A copy of this report will be provided to any shareholder who requests it.

 

 

VANCOUVER OFFICE

Suite 770

800 W. Pender Street

Vancouver, BC V6C 2V6

 

604 630 1399 phone

866 630 1399 toll free

604 681 0894 fax

   

TSX: MAG

NYSE American : MAG

www.magsilver.com

info@magsilver.com

 

 

 

 

 

MAG SILVER CORP.         
Condensed Interim Consolidated Statements of Financial Position 
          
(In thousands of US dollars, unless otherwise stated - Unaudited)      
   Note 

March 31,

2020

 

December 31,

2019

          
ASSETS               
                
CURRENT               
Cash and cash equivalents   3, 17   $70,327   $72,360 
Accounts receivable   4    94    83 
Prepaid expenses        700    269 
TOTAL CURRENT ASSETS        71,121    72,712 
INVESTMENTS   5    426    1,408 
INVESTMENT IN JUANICIPIO   6    132,125    136,643 
EXPLORATION AND EVALUATION ASSETS   7    7,911    7,266 
PROPERTY AND EQUIPMENT   8    747    781 
TOTAL ASSETS       $212,330   $218,810 
                
LIABILITIES               
                
CURRENT               
Trade and other payables       $602   $780 
Current portion of lease obligation   8    76    74 
TOTAL CURRENT LIABILITIES        678    854 
NON-CURRENT               
Lease obligation   8    408    467 
Deferred income taxes   16    10,676    1,982 
Provision for reclamation   7    286    260 
TOTAL LIABILITIES        12,048    3,563 
                
EQUITY               
                
Share capital   9    400,828    399,995 
Equity reserve        17,528    17,777 
Accumulated other comprehensive loss        (1,458)   (1,015)
Deficit        (216,616)   (201,510)
TOTAL EQUITY        200,282    215,247 
TOTAL LIABILITIES AND EQUITY       $212,330   $218,810 
                
COMMITMENTS AND CONTINGENCIES   6,7,15           
                
SUBSEQUENT EVENTS   17           

 

See accompanying notes to the consolidated financial statements

 

2

 

 

MAG SILVER CORP.         
Condensed Interim Consolidated Statements of Loss and Comprehensive Loss
(In thousands of US dollars, except for shares and per share amounts - Unaudited)
          
      For the three months ended
      March 31
   Note  2020  2019
EXPENSES         
Accounting and audit       $69   $58 
Amortization   8    30    27 
Filing and transfer agent fees        235    214 
Foreign exchange (gain) loss        (5)   46 
General office expenses        205    170 
Legal        141    86 
Management compensation and consulting fees        474    576 
Mining taxes and other property costs        7    296 
Share based payment expense   9b,c,d   478    224 
Shareholder relations        111    104 
Travel        46    68 
         1,791    1,869 
INTEREST INCOME        274    844 
CHANGE IN FAIR VALUE OF WARRANTS        -    (18)
EQUITY PICK UP FROM INVESTMENT IN JUANICIPIO   6    (4,687)   282 
LOSS FOR THE PERIOD BEFORE INCOME TAX       $(6,204)  $(761)
                
DEFERRED INCOME TAX (EXPENSE) BENEFIT   16    (8,694)   319 
LOSS FOR THE PERIOD       $(14,898)  $(442)
                
OTHER COMPREHENSIVE LOSS               
Items that will not be reclassified subsequently to profit or loss:               
UNREALIZED LOSS ON EQUITY SECURITIES,  NET OF TAXES   5    (651)   (147)
         (651)   (147)
                
TOTAL COMPREHENSIVE LOSS       $(15,549)  $(589)
                
BASIC AND DILUTED LOSS PER SHARE       $(0.17)  $(0.01)
                
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING               
BASIC AND DILUTED        86,558,647    85,539,476 

 

See accompanying notes to the condensed interim consolidated financial statements

 

3

 

 

MAG SILVER CORP.           
Condensed Interim Consolidated Statements of Changes in Equity
(In thousands of US dollars, except shares - Unaudited)                  
               Accumulated      
      Common shares     other      
      without par value  Equity  comprehensive     Total
   Note  Shares  Amount  Reserve  income (loss)  Deficit  equity
Balance, January 1, 2019      85,539,476   $392,916   $18,696   $(681)  $(197,050)  $213,881 
IFRS 16 transition adjustment on January 1, 2019      -    -    -    -    (34)   (34)
Stock options exercised  9a,b   442,052    4,059    (1,240)   -    -    2,819 
Stock options exercised cashless  9a,b   428,934    1,762    (1,762)   -    -    - 
Restricted and performance share units converted  9a,c   75,219    662    (662)   -    -    - 
Deferred share units converted  9a,d   60,166    596    (596)               
Share based payment  9b,c,d   -    -    3,341    -    -    3,341 
                                  
Unrealized loss on equity securities  5   -    -    -    (334)   -    (334)
Net loss      -    -    -    -    (4,426)   (4,426)
Total Comprehensive Loss      -    -    -    (334)   (4,426)   (4,760)
                                  
Balance, December 31, 2019      86,545,847   $399,995   $17,777   $(1,015)  $(201,510)  $215,247 
Stock options exercised  9a,b   15,000    150    (44)   -    -    106 
Stock options exercised cashless  9a,b   19,377    120    (120)   -    -    - 
Restricted and performance share units converted  9a,c   14,771    563    (563)   -    -    - 
Share based payment  9b,c,d   -    -    478    -    -    478 
Transfer of loss on disposal of equity securities at FVOCI to deficit  
 
 
5
 
 
 
 
 
-
 
 
 
 
 
 
 
-
 
 
 
 
 
 
 
-
 
 
 
 
 
 
 
208
 
 
 
 
 
 
 
(208
 
)
 
 
 
 
 
-
 
 
                                  
Unrealized loss on equity securities  5   -    -    -    (651)   -    (651)
Net loss      -    -    -    -    (14,898)   (14,898)
Total Comprehensive Loss      -    -    -    (651)   (14,898)   (15,549)
                                  
Balance, March 31, 2020      86,594,995   $400,828   $17,528   $(1,458)  $(216,616)  $200,282 
                                  
                                  
Three months ended, March 31, 2019                                 
Balance, January 1, 2019      85,539,476   $392,916   $18,696   $(681)  $(197,050)  $213,881 
IFRS 16 transition adjustment on January 1, 2019      -    -    -    -    (34)   (34)
Stock options exercised  9a,b   -    -    224    -    -    224 
                                  
Unrealized loss on equity securities  5   -    -    -    (147)   -    (147)
Net loss      -    -    -    -    (442)   (442)
Total Comprehensive Loss      -    -    -    (147)   (442)   (589)
                                  
Balance, March 31, 2019      85,539,476   $392,916   $18,920   $(828)  $(197,526)  $213,482 

 

See accompanying notes to the condensed interim consolidated financial statements

 

4

 

 

MAG SILVER CORP.         
Condensed Interim Consolidated Statements of Cash Flows
(In thousands of US dollars, unless otherwise stated - Unaudited)      
      For the three months ended
      March 31
   Note  2020  2019
          
OPERATING ACTIVITIES               
Loss for the period       $(14,898)  $(442)
Items not involving cash:               
Amortization   8    30    27 
Change in fair value of warrants        -    18 
Deferred income tax expense (benefit)   16    8,694    (319)
Equity pick up from associate   6    4,687    (282)
Share based payment expense   9b,c,d   478    224 
Unrealized foreign exchange (gain) loss        (5)   50 
                
Changes in operating assets and liabilities               
Accounts receivable        (11)   105 
Prepaid expenses        (431)   (229)
Trade and other payables        (160)   (251)
Net cash used in operating activities        (1,616)   (1,099)
                
INVESTING ACTIVITIES               
Exploration and evaluation expenditures   7    (624)   (320)
Investment in Juanicipio   6    (172)   (81)
Proceeds from disposition of equity securities held in Investments   5    331    - 
Purchase of equipment   8    (5)   (13)
Net cash used in investing activities        (470)   (414)
                
FINANCING ACTIVITIES               
Issuance of common shares upon exercise of stock options   9    106    - 
Payment of lease obligation (principal)   8    (16)   (22)
Net cash from (used in) financing activities        90    (22)
                
EFFECTS OF EXCHANGE RATE CHANGES ON               
CASH AND CASH EQUIVALENTS        (37)   (38)
                
DECREASE IN CASH AND CASH EQUIVALENTS        (2,033)   (1,573)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD        72,360    130,180 
CASH AND CASH EQUIVALENTS, END OF PERIOD       $70,327   $128,607 

 

See accompanying notes to the condensed interim consolidated financial statements

 

5

MAG SILVER CORP.

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended March 31, 2020 and 2019

(Expressed in thousands of US dollars unless otherwise stated)

 

1.       NATURE OF OPERATIONS

 

MAG Silver Corp. (the “Company” or “MAG”) was incorporated on April 21, 1999 under the Company Act of the Province of British Columbia and its shares were listed on the TSX Venture Exchange on April 21, 2000 and subsequently moved to a TSX listing on October 5, 2007. The Company was also listed on what is now the NYSE American Exchange on July 9, 2007.

 

The Company is an advanced stage development and exploration company that is focused on the acquisition, exploration and development of high-grade, district-scale projects located primarily in the Americas. The Company’s principal asset is a 44% interest in the Juanicipio joint venture (see Note 6) located in Mexico, which is now in the construction phase heading to production. The Company defers all acquisition, exploration and development costs related to the properties on which it is conducting exploration. The recoverability of these amounts is dependent upon the existence of economically recoverable reserves, the ability of the Company to obtain the necessary financing to complete the development of the interests, and future profitable production, or alternatively, upon the Company’s ability to dispose of its interests on a profitable basis.

 

Although the Company has taken steps to verify title to the properties on which it is conducting exploration and in which it has an interest, in accordance with industry standards for the current stage of exploration of such properties, these procedures do not guarantee the Company’s title. Property title may be subject to unregistered prior agreements and non-compliance with regulatory requirements.

 

Address of registered offices of the Company:

2600 – 595 Burrard Street

Vancouver, British Columbia,

Canada V7X 1L3

 

Head office and principal place of business:

770 – 800 West Pender Street

Vancouver, British Columbia,

Canada V6C 2V6

 

During the first quarter of 2020 and subsequent to March 31, 2020, the COVID-19 pandemic has had a material impact on the global economy, the scale and duration of which remain uncertain. In response, the Federal Government of Mexico has issued an administrative order for the temporary suspension of all “non-essential activities” until May 30, 2020 as part of its nationwide effort to slow the spread of the COVID-19 virus. The Company’s Investment in Associate (Note 6) encompasses the Juanicipio Project in Mexico. The project operator, Fresnillo plc (“Fresnillo”), has communicated to the Company that they have been in regular consultation with the Mexican Government Officials to determine the most appropriate compliance approach while attempting to minimize the overall impact on project development. Subsequent to the quarter end, the Company reported that in response to COVID-19 virus, Fresnillo had temporarily stopped surface construction work at Juanicipio, and the underground operation has been temporarily reduced to a minimum working level under rigid hygienic protocols.

 

The impact of this pandemic could include significant COVID-19 specific costs, volatility in the prices for silver and other metals, further restrictions or temporary closures, additional travel restraints, other 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 impairment charges to the Company’s assets.

 

6

MAG SILVER CORP.

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended March 31, 2020 and 2019

(Expressed in thousands of US dollars unless otherwise stated)

 

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Statement of compliance

 

These condensed interim consolidated financial statements (“Interim Financial Statements”) are prepared under International Accounting Standards 34 Interim Financial Reporting (“IAS 34”) in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). They do not include all of the information required for full annual IFRS financial statements and therefore should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2019.

 

The accounting policies applied in the preparation of the Interim Financial Statements are consistent with those applied and disclosed in the Company’s audited consolidated financial statements for the year ended December 31, 2019, except for policies newly adopted as stated below:

 

IFRS 3 Business Combinations. On October 22, 2018, the IASB issued narrow-scope amendments to IFRS 3 Business Combinations that intend to assist entities to determine whether a transaction should be accounted for as a business combination or an asset acquisition. The amendments include an election to use a concentration test. This is a simplified assessment that results in an asset acquisition if substantially all of the fair value of the gross assets is concentrated in a single identifiable asset or a group of identifiable assets. If a preparer chooses not to apply the concentration test, or the test is failed, then the assessment focuses on the existence of a substantive process. The amendments apply to businesses acquired in annual reporting periods beginning on or after January 1, 2020. The Company will apply these amendments to applicable acquisition transactions entered into after January 1, 2020.

 

These Interim Financial Statements have been prepared on a historical cost basis except for the revaluation of certain financial instruments, which are stated at their fair value.

 

These Interim Financial Statements were authorized for issuance by the Board of Directors of the Company on May 13, 2020.

 

(a)       Basis of consolidation

 

These Interim Financial Statements include the accounts of the Company and its controlled subsidiaries. Control exists when the Company has power over the investee, is exposed or has rights to variable returns from its involvement with the investee, and has the ability to use its power over the investee to affect the amount of the investor’s returns. Subsidiaries are included in the consolidated financial results of the Company from the effective date that control is obtained up to the effective date of disposal or loss of control. The principal wholly-owned subsidiaries as at March 31, 2020 are Minera Los Lagartos, S.A. de C.V., and Minera Pozo Seco S.A. de C.V. All intercompany balances, transactions, revenues and expenses have been eliminated upon consolidation.

 

7

MAG SILVER CORP.

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended March 31, 2020 and 2019

(Expressed in thousands of US dollars unless otherwise stated)

 

These Interim Financial Statements also include the Company’s 44% interest in Minera Juanicipio S.A. de C.V. (Note 6, “Investment in Juanicipio”), an associate (Note 2(b)) accounted for using the equity method.

 

Where necessary, adjustments have been made to the financial statements of the Company’s subsidiaries and associates prior to consolidation, to conform with the significant accounting policies used in their preparation to those used by the Company.

 

(b)       Investments in Associates

 

The Company conducts a high percentage of its business through an equity interest in associates. An associate is an entity over which the Company has significant influence, and is neither a subsidiary nor a joint arrangement, and includes the Company’s 44% interest in Minera Juanicipio S.A. de C.V., a Mexican incorporated joint venture company (Note 6, Investment in Juanicipio). The Company has significant influence when it has the power to participate in the financial and operating policy decisions of the associate but does not have control or joint control over those policies.

 

The Company accounts for its investments in associates using the equity method. Under the equity method, the Company’s investment in an associate is initially recognized at cost and subsequently increased or decreased to reflect additional contributions or withdrawals and to recognize the Company's share of earnings and losses of the associate and for impairment losses after the initial recognition date. The Company's share of earnings and losses of associates are recognized in profit or loss during the period. Distributions received from an associate are accounted for as a reduction in the carrying amount of the Company’s investment.

 

Impairment

 

At the end of each reporting period, the Company assesses whether there is any evidence that an investment in associate is impaired. The Company has performed an assessment for impairment indicators of its investment in associate as of March 31, 2020 and noted no impairment indicators. This assessment is generally made with reference to the timing of completing construction of the development project, future production, future silver, gold, lead and zinc prices, future capital requirements, future operating costs, exploration results achieved, and an assessment of the likely operating and estimated cash flow results to be achieved. When there is evidence that an investment in associate is impaired, the carrying amount of such investment is compared to its recoverable amount. If the recoverable amount of an investment in associate is less than its carrying amount, the carrying amount is reduced to its recoverable amount and an impairment loss, being the excess of carrying amount over the recoverable amount, is recognized in the period of impairment. When an impairment loss reverses in a subsequent period, the carrying amount of the investment in associate is increased to the revised estimate of recoverable amount to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had an impairment loss not been previously recognized. A reversal of an impairment loss is recognized in profit or loss in the period the reversal occurs.

 

8

MAG SILVER CORP.

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended March 31, 2020 and 2019

(Expressed in thousands of US dollars unless otherwise stated)

 

(c)       Significant Estimates

 

The preparation of consolidated financial statements in conformity with IFRS requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenditures during the reported period. Significant estimates used in preparation of these financial statements include estimates of the recoverable amount and any impairment of exploration and evaluation assets and of investment in associates, recovery of receivable balances, estimates of fair value of financial instruments where a quoted market price or secondary market for the instrument does not exist, provisions including closure and reclamation, share based payment expense, and income tax provisions. Actual results may differ from those estimated. Further details of the nature of these estimates may be found in the relevant notes to the consolidated statements.

 

(d)       Critical judgments

 

The Company makes certain critical judgments in the process of applying the Company’s accounting policies. The following are those judgments that have the most significant effect on the consolidated financial statements:

 

(i)     The Company reviews and assesses the carrying amount of exploration and evaluation assets, and its investment in associates for impairment when facts or circumstances suggest that the carrying amount is not recoverable. Assessing the recoverability of these amounts requires considerable professional technical judgment, and is made with reference to the timing of exploration work, work programs proposed, exploration results achieved by the Company and by others in the related area of interest, and an assessment of the likely results to be achieved from performance of further exploration (see Notes 2(b) and 2(g)).

 

(ii)   In the normal course of operations, the Company may invest in equity investments for strategic reasons. In such circumstances, management considers whether the facts and circumstances pertaining to each investment result in the Company obtaining control, joint control or significant influence over the investee entity. In some cases, the determination of whether or not the Company has control, joint control or significant influence over the investee entities requires the application of significant management judgment to consider individually and collectively such factors as:

 

·The purpose and design of the investee entity.
·The ability to exercise power, through substantive rights, over the activities of the investee entity that significantly affect its returns.
·The size of the company’s equity ownership and voting rights, including potential voting rights.
·The size and dispersion of other voting interests, including the existence of voting blocks.
·Other investments in or relationships with the investee entity including, but not limited to, current or possible board representation, loans and other types of financial support, material transactions with the investee entity, interchange of managerial personnel or consulting positions.
·Other relevant and pertinent factors.

 

9

MAG SILVER CORP.

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended March 31, 2020 and 2019

(Expressed in thousands of US dollars unless otherwise stated)

 

If the Company determines that it controls an investee entity, it consolidates the investee entity’s financial statements as further described in note 2(a). If the Company determines that it has joint control (a joint venture) or significant influence (an associate) over an investee entity, then it uses the equity method of accounting to account for its investment in that investee entity as further described in note 2(b).  If, after careful consideration, it is determined that the Company neither has control, joint control nor significant influence over an investee entity, the Company accounts for the corresponding investment in equity interest as fair value through other comprehensive income investment as further described in note 2(e), and classifies the investment as current or non-current depending on management’s intention with respect to the investment and whether it expects to realize the asset within the next twelve months.

 

(e)       Financial instruments

 

Financial assets

 

Financial assets are classified as either financial assets at fair value through profit or loss (“FVTPL”), fair value through other comprehensive income (“FVTOCI”) or amortized cost. The Company determines the classification of financial assets at initial recognition.

 

(i)  Financial assets at FVTPL

 

Financial assets carried at FVTPL are initially recorded at fair value and transaction costs are expensed in profit or loss. Equity instruments that are held for trading and all equity derivative instruments are classified as FVTPL. Equity derivative instruments such as warrants listed on a recognized exchange are valued at the latest available closing price. Warrants not listed on a recognized exchange, but where a secondary market exists, are valued at independent broker prices (if available) traded within that secondary market. If no secondary market exists, the warrants are valued using the Black Scholes option pricing model. Realized and unrealized gains and losses arising from changes in the fair value of the financial assets held at FVTPL are included in profit or loss in the period in which they arise.

 

(ii) Financial assets at FVTOCI

 

Financial assets carried at FVTOCI are initially recorded at fair value plus transaction costs with all subsequent changes in fair value recognized in other comprehensive income (loss). For investments in equity instruments that are not held for trading, the Company can make an irrevocable election (on an instrument-by-instrument bases) at initial recognition to classify them as FVTOCI. On the disposal of the investment, the cumulative change in fair value remains in other comprehensive income (loss) and is not recycled to profit or loss.

 

(iii)        Financial assets at amortized cost

 

Financial assets are classified at amortized cost if the objective of the business model is to hold the financial asset for the collection of contractual cash flows, and the assets’ contractual cash flows are comprised solely of payments of principal and interest. The Company’s accounts receivable are recorded at amortized cost as they meet the required criteria. A provision is recorded based on the expected credit losses for the financial asset and reflects changes in the expected credit losses at each reporting period (see impairment below).

 

10

MAG SILVER CORP.

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended March 31, 2020 and 2019

(Expressed in thousands of US dollars unless otherwise stated)

 

Financial liabilities

 

Financial liabilities are initially recorded at fair value and subsequently measured at amortized cost, unless they are required to be measured at FVTPL (such as derivatives) or the Company has elected to measure at FVTPL. The Company’s financial liabilities include trade and other payables and lease obligations which are classified at amortized cost.

 

The Company classifies financial instruments as follows:

 

Financial instrument  Classification
Cash and cash equivalents  FVTPL
Equity securities  FVTOCI
Equity derivative securities (warrants)  FVTPL
Accounts receivable  Amortized cost
Trade and other payables  Amortized cost
Lease obligations  Amortized cost

 

Impairment

 

IFRS 9 requires an ‘expected credit loss’ model to be applied which requires a loss allowance to be recognized based on expected credit losses. This applies to financial assets measured at amortized cost. The expected credit loss model requires an entity to account for expected credit losses and changes in those expected credit losses at each reporting date to reflect changes in initial recognition. In other words, it is no longer necessary for a credit event to have occurred before credit losses are recognized.

 

(f)       Cash and cash equivalents

 

Cash and cash equivalents include cash on hand, bank deposits, and term deposits with original maturities of three months or less.

 

(g)       Exploration and evaluation assets

 

With respect to its exploration activities, the Company follows the practice of capitalizing all costs relating to the acquisition, exploration and evaluation of its mining rights and crediting all revenues received against the cost of the related interests. Option payments made by the Company are capitalized until the decision to exercise the option is made. If the option agreement is to exercise a purchase option in an underlying mineral property, the costs are capitalized and accounted for as an exploration and evaluation asset. At such time as commercial production commences, the capitalized costs will be depleted on a units-of-production method based on proven and probable reserves. If a mineable ore body is discovered, exploration and evaluation costs are reclassified to mining properties. If no mineable ore body is discovered, such costs are expensed in the period in which it is determined the property has no future economic value.

 

11

MAG SILVER CORP.

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended March 31, 2020 and 2019

(Expressed in thousands of US dollars unless otherwise stated)

 

Exploration and evaluation expenditures include acquisition costs of rights to explore; topographical, geological, geochemical and geophysical studies; exploratory drilling; trenching and sampling; all costs incurred to obtain permits and other licenses required to conduct such activities, including legal, community, strategic and consulting fees; and activities involved in evaluating the technical feasibility and commercial viability of extracting mineral resources. This includes the costs incurred in determining the most appropriate mining/processing methods and developing feasibility studies. Expenditures incurred prior to the Company obtaining the right to explore are expensed in the period in which they are incurred.

 

When an exploration project has entered into the advanced exploration phase and sufficient evidence of the probability of the existence of economically recoverable minerals has been obtained, pre-operative expenditures relating to mine preparation works are capitalized to mine development costs. Activities that are typically capitalized include costs incurred to build shafts, drifts, ramps and access corridors to enable ore extraction from underground.

 

Impairment

 

Management reviews the carrying amount of exploration and evaluation assets for impairment when facts or circumstances suggest that the carrying amount is not recoverable. This review is generally made with reference to the timing of exploration work, work programs proposed, exploration results achieved by the Company and by others in the related area of interest, and an assessment of the likely results to be achieved from performance of further exploration. When the results of this review indicate that indicators of impairment exist, the Company estimates the recoverable amount of the deferred exploration costs and related mining rights by reference to the potential for success of further exploration activity and/or the likely proceeds to be received from sale or assignment of the rights. When the carrying amounts of exploration and evaluation assets are estimated to exceed their recoverable amounts, an impairment loss is recorded in profit or loss. The cash-generating unit for assessing impairment is a geographic region and shall be no larger than the operating segment. If conditions that gave rise to the impairment no longer exist, a reversal of impairment may be recognized in a subsequent period, with the carrying amount of the exploration and evaluation asset increased to the revised estimate of recoverable amount to the extent that the increased carrying amount does not exceed the carrying amount that would have been determined had an impairment loss not been previously recognized. A reversal of an impairment loss is recognized in profit or loss in the period the reversal occurs.

 

(h)       Property and equipment

 

Property and equipment are recorded at cost less accumulated amortization and impairment losses. When parts of an item of equipment have different useful lives, they are accounted for as separate equipment items (major components).

 

Amortization is based on the depreciable amount, which is the cost of the asset, less its expected residual value.

 

Amortization on owned assets is recognized in profit or loss on a declining balance basis or straight-line basis over the estimated useful lives of each part of an item of property and equipment, based on how this most closely reflects the expected pattern of consumption of the future economic benefits embodied in the asset. Amortization for exploration assets is capitalized to mineral properties in the statement of financial position.

 

12

MAG SILVER CORP.

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended March 31, 2020 and 2019

(Expressed in thousands of US dollars unless otherwise stated)

 

The amortization rates used are as follows:

 

Building  4% declining balance
Computer equipment  30% declining balance
Office equipment  30% declining balance
Exploration camp and equipment  30% declining balance
Right-of-Use assets  straight-line over the earlier of the end of the lease term or useful life of the asset

 

Amortization methods, useful lives and residual values are reviewed at the end of each reporting period and adjusted if appropriate.

 

i)       Lease

 

At inception of a contract, the Company assesses whether a contract is, or contains a lease. A contract is, or contains a lease if the contract conveys the right to control the use of an identified asset for the period of time in exchange for consideration. The Company assesses whether the contract involves the use of an identified asset, whether the Company has the right to obtain substantially all of the economic benefits from use of the asset throughout the contract term and if the Company has the right to direct the use of the asset.

 

As a lessee, the Company recognizes a right-of-use asset and a lease liability at the commencement date of a lease. Right-of-use assets are initially measured at costs, which is comprised of the initial amount of the lease liability adjusted for any lease payment made at or before the commencement date.

 

Right-of-use assets are subsequently depreciated on a straight-line basis from the commencement date to the earlier of the end of the lease term, or the end of the useful life of the asset. In addition, the right-of-use asset may be reduced due to impairment losses, if any, and adjusted for certain remeasurements of the lease liability.

 

A lease liability is initially measured at the present value of the lease payments to be made over the lease term, discounted by the interest rate implicit in the lease or if that rate cannot be readily determined, the Company’s incremental borrowing rate. Lease payments include fixed payments, variable lease payments that depend on an index or a rate, amounts to be paid under residual value guarantees and the exercise price of a purchase option reasonably certain to be exercised by the Company.

 

The lease liability is measured at amortized cost using the effective interest method. It is remeasured when there is a modification, a change in the lease term, a change in the fixed lease payments or change in the assessment to purchase the underlying asset.

 

The Company presents the right-of-use asset in the property and equipment line item on the consolidated statements of financial position and the lease liability in the lease obligation line item on the consolidated statements of financial position.

 

13

MAG SILVER CORP.

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended March 31, 2020 and 2019

(Expressed in thousands of US dollars unless otherwise stated)

 

(j)       Income taxes

 

Deferred income taxes relate to the expected future tax consequences of unused tax losses and unused tax credits and differences between the carrying amount of statement of financial position items and their corresponding tax values. Deferred tax assets, if any, are recognized only to the extent that, in the opinion of management, it is probable that sufficient future taxable profit will be available to recover the asset. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of substantive enactment.

 

(k)       Provisions

 

Provisions are liabilities that are uncertain in timing or amount. The Company records a provision when and only when:

 

(i) The Company has a present obligation (legal or constructive) as a result of a past event;

 

(ii) It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and

 

(iii) A reliable estimate can be made of the amount of the obligation.

 

Constructive obligations are obligations that derive from the Company’s actions where:

 

(i) By an established pattern of past practice, published policies or a sufficiently specific current statement, the Company has indicated to other parties that it will accept certain responsibilities; and

 

(ii) As a result, the Company has created a valid expectation on the part of those other parties that it will discharge those responsibilities.

 

Provisions are reviewed at the end of each reporting period and adjusted to reflect management’s current best estimate of the expenditure required to settle the present obligation at the end of the reporting period. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision is reversed. Provisions are reduced by actual expenditures for which the provision was originally recognized. Where discounting has been used, the carrying amount of a provision increases in each period to reflect the passage of time. This increase (accretion expense) is included in profit or loss for the period.

 

Closure and reclamation

 

The Company records a provision for the present value of the estimated closure obligations, including reclamation costs, when the obligation (legal or constructive) is incurred, with a corresponding increase in the carrying value of the related assets. The carrying value is amortized over the life of the mining asset on a units-of-production basis commencing with initial commercialization of the asset. The liability is accreted to the actual liability on settlement through charges each period to profit or loss.

 

14

MAG SILVER CORP.

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended March 31, 2020 and 2019

(Expressed in thousands of US dollars unless otherwise stated)

 

The provision for closure and reclamation is reviewed at the end of each reporting period for changes in estimates and circumstances, including as a result of changes in regulatory requirements, discount rates and assumptions regarding the amount and timing of the expenditures. These changes are recorded directly to the related assets with a corresponding entry to the reclamation provision. The provision recorded by the Company as at March 31, 2020 of $286 relates to prior disturbances on an exploration property recently acquired (see Note 7) (March 31, 2019: nil).

 

The operating company of the Company’s investment in associate, Minera Juanicipio, S.A. de C.V., recorded a provision for reclamation and remediation costs of $738 and capitalized a corresponding asset as at March 31, 2020 (December 31, 2019: $725) (see Note 6).

 

(l)       Functional currency and presentation currency

 

The functional currency of the parent, its subsidiaries, and the investment in Juanicipio is the United States dollar (“US$”).

 

Each entity within the Company determines its own functional currency, and the items included in the financial statements of each entity are measured using that functional currency. The functional currency determination involves certain judgments in evaluating the primary economic environment, and the Company reconsiders the functional currencies of each entity if there is a change in the underlying transactions, events and conditions which determine the primary economic environment.

 

The Company’s reporting and presentation currency is the US$.

 

(m)       Foreign currency transactions

 

Transactions incurred in currencies other than the Company’s functional currency (foreign currencies) are recorded at the rates of exchange prevailing at the dates of the transactions. At each statement of financial position date, monetary assets and liabilities are translated using the period end foreign exchange rate. Non-monetary assets and liabilities are translated using the historical rate on the date of the transaction. Non-monetary assets and liabilities that are stated at fair value are translated using the rate on the date that the fair value was determined. All gains and losses on translation of these foreign currency transactions are included in profit or loss.

 

(n)       Loss per common share

 

Basic loss per share is based on the weighted average number of common shares outstanding during the period.

 

Diluted loss per share is computed using the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares consist of the incremental common shares upon the assumed exercise of stock options and warrants, and upon the assumed conversion of deferred share units and units issued under the Company’s share unit plan, to the extent their inclusion is not anti-dilutive.

 

15

MAG SILVER CORP.

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended March 31, 2020 and 2019

(Expressed in thousands of US dollars unless otherwise stated)

 

As at March 31, 2020, the Company had 2,386,124 (March 31, 2019: 2,817,280) common share equivalents consisting of: common shares issuable upon the exercise of outstanding exercisable stock options; restricted and performance share units; and deferred share units. These common share equivalents were not included for the purpose of calculating diluted loss per share as their effect would be anti-dilutive.

 

(o)       Share based payments

 

The fair value of equity-settled share-based payment awards are estimated as of the date of the grant and recorded as share-based payment expense in profit or loss over their vesting periods, with a corresponding increase in equity. The amount recognized as an expense is adjusted to reflect the number of awards for which the related service and non-market vesting conditions are expected to be met. Market price performance conditions are included in the fair value estimate on the grant date with no subsequent adjustment to the actual number of awards that vest. Forfeiture rates are estimated on grant date, and adjusted annually for actual forfeitures in the period. Changes to the estimated number of awards that will eventually vest are accounted for prospectively. Share based payment awards with graded vesting schedules are accounted for as separate grants with different vesting periods and fair values.

 

The fair value of stock options is estimated using the Black-Scholes-Merton option valuation model. The fair value of restricted and deferred share units, is based on the fair market value of a common share equivalent on the date of grant. The fair value of performance share units awarded with market price conditions is determined using the Monte Carlo pricing model and the fair value of performance share units with non-market performance conditions is based on the fair market value of a common share equivalent on the date of grant.

 

(p)       Changes in Accounting Standards

 

There are no new accounting pronouncements affecting the Company that have been issued but are not yet effective at March 31, 2020.

 

3.       CASH AND CASH EQUIVALENTS

 

The Company’s cash and cash equivalents include cash on hand, bank deposits and term deposits with original maturities of three months or less, as follows:

 

    March 31,    December 31, 
    2020    2019 
Cash at bank and on hand  $1,327   $72,360 
Term deposit (less than 90 days)   69,000    - 
Cash and cash equivalents  $70,327   $72,360 

 

Term deposits classified as ‘cash equivalents’ are comprised of bank term deposits with a term to maturity of less than three months from date of acquisition and interest only payable if held to maturity.

 

16

MAG SILVER CORP.

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended March 31, 2020 and 2019

(Expressed in thousands of US dollars unless otherwise stated)

 

A financing was completed subsequent to the quarter end for gross proceeds of Canadian $60 million (see Note 17).

 

4.       ACCOUNTS RECEIVABLE

 

    March 31,    December 31, 
    2020    2019 
Goods and services tax ("GST") recoverable  $42   $27 
Mexican value added tax ("IVA") recoverable   52    55 
Interest receivable   -    1 
   $94   $83 

 

5.       INVESTMENTS

 

The Company holds investments as follows:

 

    March 31,    December 31, 
    2020    2019 
Equity securities, beginning of period  $1,408   $1,742 
Disposition of equity securities at fair value   (331)   - 
Unrealized loss for the period   (651)   (334)
Equity securities, end of period  $426   $1,408 

 

During the three months ended March 31, 2020, the Company disposed of certain equity securities held as investments. The proceeds on disposition were $331, and the Company recognized a loss on disposal of $208 which was transferred from other comprehensive loss to retained earnings. During the three months ended March 31, 2020, the Company recorded an unrealized loss of $651, net of nil tax, in other comprehensive loss (March 31, 2019: $147) on its investment in equity securities designated as FVTOCI instruments.

 

6.       INVESTMENT IN JUANICIPIO

 

The Company acquired a 100% interest in the Juanicipio property effective July 16, 2003. Pursuant to an agreement effective July 1, 2005 (the “Agreement”) with Industrias Peñoles, S.A. de C.V. (“Peñoles”), the Company granted Peñoles or any of its subsidiaries an option to earn a 56% interest in the Juanicipio Property in Mexico in consideration for Peñoles conducting $5,000 of exploration on the property over four years and Peñoles purchasing $1,000 of common shares of the Company in two tranches for $500 each.

 

In mid 2007, Peñoles met all of the earn-in requirements of the Agreement. In December 2007, the Company and Peñoles created an operating company named Minera Juanicipio, S.A. de C.V. (“Minera Juanicipio”) for the purpose of holding and operating the Juanicipio Property. In 2008, MAG was notified that Peñoles had transferred its 56% interest of Minera Juanicipio to Fresnillo Fresnillo pursuant to a statutory merger. Minera Juanicipio is held 56% by Fresnillo and 44% by the Company. Fresnillo is the operator of Minera Juanicipio, and with its affiliates, beneficially owns 11.3% of the common shares of the Company as at March 31, 2020, as publicly reported. In December 2007, all mineral rights and surface rights relating to the Juanicipio project held by the Company and Peñoles, respectively, were ceded into Minera Juanicipio. Minera Juanicipio is governed by a shareholders agreement. All costs relating to the project and Minera Juanicipio are required to be shared by the Company and Fresnillo pro-rata based on their ownership interests in Minera Juanicipio, and if either party does not fund pro-rata, their ownership interest will be diluted in accordance with the Minera Juanicipio shareholders agreement.

 

17

MAG SILVER CORP.

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended March 31, 2020 and 2019

(Expressed in thousands of US dollars unless otherwise stated)

 

The Company has recorded its investment in Minera Juanicipio (“Investment in Juanicipio”) using the equity basis of accounting. The cost of the investment includes the carrying value of the deferred exploration and mineral and surface rights costs incurred by the Company on the Juanicipio Property and contributed to Minera Juanicipio plus the required net cash investment to establish and maintain its 44% interest.

 

The Company’s investment relating to its interest in the Juanicipio property and Minera Juanicipio is detailed as follows for the three months ended March 31, 2020 and the year ended December 31, 2019:

 

    March 31,    December 31, 
    2020    2019 
Joint venture oversight expenditures incurred 100% by MAG  $169   $345 
Cash contributions to Minera Juanicipio (1)   -    53,200 
Total for the period   169    53,545 
Equity pick up of current (loss) income for the period (2)   (4,687)   1,884 
Balance, beginning of period   136,643    81,214 
Balance, end of period  $132,125   $136,643 
           
(1) Represents the Company's 44% share of Minera Juanicipio cash contributions for the period.
(2) Represents the Company's 44% share of Minera Juanicipio's (loss) income for the period, as determined by the Company.

 

18

MAG SILVER CORP.

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended March 31, 2020 and 2019

(Expressed in thousands of US dollars unless otherwise stated)

 

Summary of financial information of Minera Juanicipio (on a 100% basis reflecting adjustments made by the Company, including adjustments for differences in accounting policies):

 

Minera Juanicipio Financial information, March 31 2020

 

    March 31,    December 31, 
    2020    2019 
           
Cash and cash equivalents  $6,815   $29,601 
IVA and other receivables   17,503    19,163 
Prepaids   -    101 
Total current assets   24,318    48,865 
Right-of-use asset   15    8 
Minerals, surface rights, exploration & development expenditures   280,366    261,023 
Total assets  $304,699   $309,896 
           
Payables to Peñoles and other vendors  $4,269   $5,600 
Total current liabilities   4,269    5,600 
Lease liability   6    9 
Provision for reclamation and remediation costs   738    725 
Deferred income tax liability   10,064    3,288 
Total liabilities   15,077    9,622 
Shareholders equity   289,622    300,274 
Total liabilities and equity  $304,699   $309,896 

 

    March 31,    December 31, 
    2020    2019 
           
(Loss) Income for the period before income tax  $(3,875)  $946 
Deferred income tax (expense) benefit   (6,776)   3,337 
           
(Loss) Income for the period  $(10,651)  $4,283 
           
MAG's 44% equity pick up  $(4,687)  $1,884 

 

Underground mine development, initial mill and other capital development expenditures, evaluation and exploration expenditures capitalized directly by Minera Juanicipio for the three months ended March 31, 2020 amounted to $19,343 (March 31, 2019: $10,093).

 

(Loss) Income in Minera Juanicipio includes interest income, exchange gains and (losses), and deferred income tax benefits (expense). The $6,776 deferred tax expense recognized for the three months ended March 31, 2020 (year ended December 31, 2019: $3,337 deferred tax benefit) is in relation to temporary differences between the book and tax base of its Mexican non-monetary assets. The tax base of these non-monetary assets is determined in a different currency (Mexican Peso) than the functional currency (US$) of Minera Juanicipio, and changes in the exchange rate can give rise to temporary differences that result in deferred tax liability in accordance with IAS 12 Income Taxes. With the significant weakening of the Mexican Pesos against the US$ from 18.87 Pesos/US$ on December 31, 2019 to 24.29 on March 31, 2020, a deferred tax expense and a corresponding increase of the previously recognized deferred tax liability was recognized by Minera Juanicipio in the current period.

 

19

MAG SILVER CORP.

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended March 31, 2020 and 2019

(Expressed in thousands of US dollars unless otherwise stated)

 

There are no direct operating expenses in Minera Juanicipio, as development and evaluation and exploration expenditures are capitalized until commercial production is achieved.

 

7.       EXPLORATION AND EVALUATION ASSETS

 

(a) In 2017, the Company entered into an option earn-in agreement with a private group whereby the Company can earn up to a 100% interest in a prospective land claim package. There are no further exploration funding requirements under the agreement as at March 31, 2020. However, to earn a 100% interest in the property package, the Company must make combined remaining cash payments of $350 over the third, fourth and fifth annual anniversaries of the agreement, at which time the vendors would retain a 2% net smelter returns royalty (“NSR”).

 

(b) In late 2018, the Company entered into an option agreement with another private group whereby the Company has the right to earn 100% ownership interest in a company which owns a prospective land claim package. The Company paid $150 upon signing the agreement. To earn 100% interest in the property, the Company must make combined remaining cash payments of $1,850 over the next 9 years, and fund a cumulative of $30,000 of eligible exploration expenditures ($2,498 incurred to March 31, 2020) by 2028. As at March 31, 2020, the Company also recorded a provision of $286 for a reclamation liability assumed as a result of environmental rehabilitation associated with the project. Other than the reclamation liability, the balance of cash payments and exploration commitments are optional at the Company’s discretion. Upon the Company’s 100% earn-in, the vendors would retain a 2% NSR.

 

To March 31, 2020, the Company has incurred the following exploration and evaluation expenditures on these earn-in projects:

 

    Three months ended    Year ended 
    March 31, 2020    December 31, 2019 
Exploration and evaluation assets:          
Acquisition costs          
Option payments  $-   $75 
Reclamation obligation   26    260 
Total acquisition costs   26    335 
Geochemical   2    142 
Camp and site costs   69    354 
Geological consulting   352    1,784 
Geophysical   24    100 
Land taxes and government fees   48    411 
Legal, community and other consultation costs   85    260 
Travel   39    232 
Total for the period   645    3,618 
Balance, beginning of period   7,266    3,648 
Balance, end of period  $7,911   $7,266 

 

20

MAG SILVER CORP.

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended March 31, 2020 and 2019

(Expressed in thousands of US dollars unless otherwise stated)

 

Included in exploration and evaluation assets at March 31, 2020, are trade and other payables of $64 (March 31, 2019: $47) and a reclamation obligation accrued in the quarter of $26 (March 31, 2019: nil), both non-cash investing activities.

 

A full impairment was recognized on the Cinco de Mayo property in Mexico in prior years, although the concessions are still maintained in good standing.

 

8.       PROPERTY AND EQUIPMENT AND LEASES

 

As at March 31, 2020, the Company had the following property and equipment:

 

Cost   Office and computer equipment     Exploration camp and equipment    Right of use asset     Total 
Balance, January 1, 2019  $470   $-   $-   $470 
Additions   13    341    550    904 
Balance, December 31, 2019   483    341    550    1,374 
Additions   -    5    -    5 
Balance, March 31, 2020  $483   $346   $550   $1,379 

 

Accumulated depreciation   Office and computer equipment     Exploration camp and equipment    Right of use asset    Total 
Balance, January 1, 2019  $435   $-   $-   $435 
Amortization   14    52    92    158 
Balance, December 31, 2019   449    52    92    593 
Amortization   3    9    27    39 
Balance, March 31, 2020  $452   $61   $119   $632 

 

Carrying amounts   Office and computer equipment     Exploration camp and equipment    Right of use asset    Total 
At December 31, 2019  $34   $289   $458   $781 
At March 31, 2020  $31   $285   $431   $747 

 

21

MAG SILVER CORP.

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended March 31, 2020 and 2019

(Expressed in thousands of US dollars unless otherwise stated)

 

Lease obligation

 

Minimum lease payments in respect of lease obligation and the effect of discounting are as follows:

 

    March 31, 
    2020 
Undiscounted minimum lease payments     
Less than one year  $135 
Two to three years   272 
Four to five years   246 
Thereafter   - 
    653 
Effect of discounting   (169)
Present value of minimum lease payments - total lease obligation   484 
Less: current portion   (76)
Long-term lease obligation  $408 

 

For the three months ended March 31, 2020, the Company recognized $17 of interest expense on the lease obligation included in ‘General Office Expense’ (March 31, 2019: $13).

 

9.       SHARE CAPITAL

 

(a)       Issued and outstanding

 

The Company is authorized to issue an unlimited number of common shares without par value.

 

As at March 31, 2020, there were 86,594,995 shares outstanding (March 31, 2019: 85,539,476).

 

During the three months ended March 31, 2020, 15,000 stock options (March 31, 2019: nil) were exercised for cash proceeds of $106 (March 31, 2019: nil). An additional 46,667 stock options (March 31, 2019: nil) were exercised under a less dilutive cashless exercise provision of the plan, whereby 19,377 shares (March 31, 2019: nil) were issued in settlement of the stock options, and the remaining 27,290 options (March 31, 2019: nil) were cancelled.

 

During the three months ended March 31, 2020, 3,334 restricted share units and 11,437 performance share units were converted into shares.

 

During the year ended December 31, 2019, 442,052 stock options were exercised for cash proceeds of $2,819. An additional 812,323 stock options were exercised under a less dilutive cashless exercise provision of the plan, whereby 428,934 shares were issued in settlement of the stock options, and the remaining 383,389 options were cancelled.

 

During the year ended December 31, 2019, 43,343 restricted share units, 31,876 performance share units and 60,166 deferred share units were converted into shares.

 

22

MAG SILVER CORP.

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended March 31, 2020 and 2019

(Expressed in thousands of US dollars unless otherwise stated)

 

(b)       Stock options

 

The Company may enter into Incentive Stock Option Agreements with officers, employees, and consultants. On June 15, 2017, the Shareholders re-approved the Company’s rolling Stock Option Plan (the “Plan”). The maximum number of common shares that may be issuable under the Plan is set at 5% of the number of issued and outstanding common shares on a non-diluted basis at any time, provided that the number of common shares issued or issuable under the combined Plan and Share Unit Plan (Note 9(c)) shall not exceed 5% of the issued and outstanding common shares of the Company on a non-diluted basis. Options granted under the Plan have a maximum term of 5 years. As at March 31, 2020, there were 1,509,122 stock options outstanding under the Plan.

 

Stock option grants are recommended for approval to the Board of Directors by the Compensation Committee consisting of three independent members of the Board of Directors. At the time of a stock option grant, the exercise price of each option is set and in accordance with the Plan, cannot be lower than the market value of the common shares at the date of grant.

 

The following table summarizes the Company’s option activity for the period:

 

         Weighted         Weighted 
    Period ended    average    Year ended    average 
    March 31,    exercise price    December 31,    exercise price 
    2020    (C$/option)    2019    (C$/option) 
                     
Outstanding, beginning of period   1,229,341   $12.99    2,134,294   $9.59 
Granted    341,448    14.98    392,967    13.41 
Forfeited   -    -    (43,545)   15.09 
Exercised for cash   (15,000)   10.02    (442,052)   8.55 
Exercised cashless   (46,667)   9.28    (812,323)   6.57 
                     
Outstanding, end of period   1,509,122   $13.59    1,229,341   $12.99 

 

During the three months ended March 31, 2020, 341,448 stock options were granted (March 31, 2019: nil) with a weighted average grant date fair value of $1,088 or $3.19 per option (March 31, 2019: nil).

 

The Company estimated the fair value of the option using the Black-Scholes option pricing model with the following weighted average assumptions:

 

    March 31,    December 31, 
    2020    2019 
Risk-free interest rate   1.25%   1.33%
Expected volatility   40%   44%
Expected dividend yield   nil    nil 
Expected life (years)   3    3 

 

The expected volatility assumption was calculated with reference to the Company’s historical share price volatility up to the grant date to reflect a term approximate to the expected life of the option.

 

During the three months ended March 31, 2020, 61,667 stock options were exercised (March 31, 2019: nil) with a weighted average market share price at the date of exercise of C$15.22 (March 31, 2019: nil).

 

23

MAG SILVER CORP.

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended March 31, 2020 and 2019

(Expressed in thousands of US dollars unless otherwise stated)

 

The following table summarizes the Company’s stock options outstanding and exercisable as at March 31, 2020:

 

 Exercise price    Number    Number    Weighted average remaining 
 ($C/option)    outstanding    exercisable    contractual life (years) 
 9.28    261,666    261,666    0.68 
 10.02    57,500    57,500    0.23 
 12.75    25,000    -    4.60 
 13.46    347,404    115,801    4.04 
 13.91    264,997    176,664    2.68 
 14.98    341,448    -    4.91 
 17.55    211,107    211,107    1.68 
 C$9.28 - C$17.55    1,509,122    822,738    2.95 

 

During the three months ended March 31, 2020, the Company recorded share based payment expense of $167 (March 31, 2019: $87) relating to stock options vested to employees and consultants in the period.

 

(c)       Restricted and performance share units

 

On June 15, 2017, the Shareholders re-approved a share unit plan (the “Share Unit Plan”) for the benefit of the Company’s officers, employees and consultants. The Share Unit Plan provides for the issuance of common shares from treasury, in the form of Restricted Share Units (“RSUs”) and Performance Share Units (“PSUs”). The maximum number of common shares that may be issuable under the Share Unit Plan is set at 1.5% of the number of issued and outstanding common shares on a non-diluted basis, provided that the number of common shares issued or issuable under the combined Share Unit Plan and Stock Option Plan (Note 9(b)) shall not exceed 5% of the issued and outstanding common shares on a non-diluted basis. RSUs and PSUs granted under the Share Unit Plan have a term of 5 years unless otherwise specified by the Board, and each unit entitles the participant to receive one common share of the Company subject to vesting criteria, and in the case of PSUs, performance criteria.

 

During the three months ended March 31, 2020, 39,063 RSUs were granted (March 31, 2019: nil) under the Company’s Share Unit Plan, with 30,981 vesting in 12 months from the grant date, and 8,082 vesting in 13 months from the date of grant, all with a five-year term. The RSUs had a grant date fair value of $11.26 per RSU (March 31, 2019: nil) as determined using the fair market value of the common shares on the date of grant. In the three months ended March 31, 2020, 3,334 RSUs (March 31, 2019: nil) were converted and settled in common shares.

 

During the three months ended March 31, 2020, 83,940 PSUs were granted (March 31, 2019: nil) under the Company’s Share Unit Plan with a five-year term to expiry. Of the grant, 55,960 PSUs are performance-based awards and vest upon the achievement of specified targets over a three-year performance period. PSUs for which the performance targets are not achieved during the performance period, shall automatically be forfeited and canceled. The remainder of the grant, 27,980 PSUs with a five-year term to expiry, are subject to a market share price performance factor measured over a three-year performance period, resulting in a PSU vesting range from 50% (13,990) to 150% (41,970) PSUs. The PSUs had a grant date fair value of $11.26 per PSU (March 31, 2019: nil) as determined using the fair market value of the common shares on the date of grant.

 

24

MAG SILVER CORP.

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended March 31, 2020 and 2019

(Expressed in thousands of US dollars unless otherwise stated)

 

During the three months ended March 31, 2020, 11,437 PSUs were converted and settled in common shares (March 31, 2019: nil).

 

As at March 31, 2020, there were 45,729 RSUs and 260,988 PSUs issued and outstanding under the Share Unit Plan, of which 4,993 PSUs had vested and are convertible into common shares of the Company. Included in the PSUs at March 31, 2020, are 172,055 PSUs with vesting conditions subject to a market share price performance factor measured over a three-year performance period, resulting in a PSU payout range from 0% or nil PSUs to 200% or 344,110 PSUs.

 

The Company recognized a share-based payment expense of $170 (March 31, 2019: $109) relating to RSUs and PSUs vesting in the period.

 

(d)        Deferred share units

 

On June 15, 2017, the Shareholders re-approved a Deferred Share Unit Plan (the “DSU Plan”) for the benefit of the Company’s non-executive directors. The DSU Plan provides for the issuance of common shares from treasury, in the form of Deferred Share Units (“DSUs”). Directors may also elect to receive all or a portion of their annual retainer and meeting fees in the form of DSUs. DSUs may be settled in cash or in common shares issued from treasury, as determined by the Board at the time of the grant. The maximum number of common shares that may be issuable under the DSU Plan is set at 1.0% of the number of issued and outstanding common shares on a non-diluted basis.

 

During the three months ended March 31, 2020, 10,013 DSUs were granted under the plan (March 31, 2019: nil) to a new director of the Company. In addition, 6,358 DSUs (March 31, 2019: nil) were granted to directors who elected to receive all or a portion of their annual retainer and meeting fees in the form of DSUs rather than cash. A DSU share-based payment expense of $141 was recognized in the three months ended March 31, 2020 (March 31, 2019: $28). Under the DSU plan, no common shares are to be issued, or cash payments made to, or in respect of a participant in the DSU Plan prior to such eligible participant’s termination date. As at March 31, 2020, there are 570,285 DSUs issued and outstanding under the DSU Plan, all of which have vested.

 

As at March 31, 2020, there are 2,386,124 common shares issuable under the combined share compensation arrangements referred to above (the Plan, the Share Unit Plan and the DSU Plan) representing 2.76% of the issued and outstanding common shares on a non-diluted basis, and there are 2,809,576 share-based awards available for grant under these combined share compensation arrangements.

 

10.       Capital risk management

 

The Company’s objectives in managing its liquidity and capital are to safeguard the Company’s ability to continue as a going concern and to provide financial capacity to meet its strategic objectives. The capital structure of the Company consists of its equity (comprising of share capital, equity reserve, accumulated other comprehensive (loss) income and deficit), net of cash and cash equivalents.

 

25

MAG SILVER CORP.

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended March 31, 2020 and 2019

(Expressed in thousands of US dollars unless otherwise stated)

 

Capital as defined above is summarized in the following table:

 

    March 31,    December 31, 
    2020    2019 
Equity  $200,282   $215,247 
Cash and cash equivalents (Note 3)   (70,327)   (72,360)
   $129,955   $142,887 

 

The Company manages the capital structure and makes adjustments to it in light of changes in economic conditions and the risk characteristics of the underlying assets. To maintain or adjust the capital structure, the Company may attempt to issue new shares, issue debt, acquire or dispose of assets.

 

In order to facilitate the management of its capital requirements, the Company prepares annual expenditure budgets that are updated as necessary depending on various factors, including successful capital deployment and general industry conditions. The annual and updated budgets are approved by the Board of Directors. The Company currently does not pay out dividends.

 

As at March 31, 2020, the Company does not have any long-term debt and is not subject to any externally imposed capital requirements.

 

The Company has working capital of $70,443 as at March 31, 2020. The Company will likely require additional capital in the future to meet its future project and other related expenditures (see Notes 15 and 17) as the Company is currently not generating any cash flow from operations. Future liquidity therefore depends upon the Company’s ability to arrange debt or additional equity financings.

 

11.       Financial risk management

 

The Company’s operations consist of the acquisition, exploration and development of projects primarily in the Americas. The Company examines the various financial risks to which it is exposed and assesses the impact and likelihood of occurrence. These risks may include credit risk, liquidity risk, currency risk, interest rate risk and other price risks. Where material, these risks are reviewed and monitored by the Board of Directors.

 

(a)       Credit risk

 

Counterparty credit risk is the risk that the financial benefits of contracts with a specific counterparty will be lost if a counterparty defaults on its obligations under the contract. This includes any cash amounts owed to the Company by those counterparties, less any amounts owed to the counterparty by the Company where a legal right of set-off exists and also includes the fair values of contracts with individual counterparties which are recorded in the financial statements.

 

26

MAG SILVER CORP.

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended March 31, 2020 and 2019

(Expressed in thousands of US dollars unless otherwise stated)

 

(i)       Trade credit risk

The Company is in the exploration and development stage and has not yet commenced commercial production or sales. Therefore, the Company is not exposed to significant trade credit risk and overall the Company’s credit risk has not changed significantly from December 31, 2019.

 

(ii)       Cash

In order to manage credit and liquidity risk, the Company’s policy is to invest only in highly rated investment grade instruments backed by Canadian commercial banks.

 

(iii)        Mexican value added tax

As at March 31, 2020, the Company had a receivable of $52 from the Mexican government for value added tax (Note 4). Management expects the balance to be fully recoverable within the year.

 

The Company’s maximum exposure to credit risk is the carrying value of its cash and cash equivalents, and accounts receivable, as follows:

 

    March 31,    December 31, 
    2020    2019 
Cash and cash equivalents (Note 3)  $70,327   $72,360 
Accounts receivable (Note 4)   94    83 
   $70,421   $72,443 

 

(b)       Liquidity risk

 

The Company has a planning and budgeting process in place to help determine the funds required to support the Company's normal operating requirements, its exploration and development plans, and its various optional property and other commitments (see Notes 7 and 15). The annual budget is approved by the Board of Directors. The Company ensures that there are sufficient cash balances to meet its short-term business requirements.

 

The Company's overall liquidity risk has not changed significantly from the prior year.

 

(c)       Currency risk

 

The Company is exposed to the financial risks related to the fluctuation of foreign exchange rates, both in the Mexican peso and Canadian dollar, relative to the US$. The Company does not use any derivative instruments to reduce its exposure to fluctuations in foreign exchange rates. The Company is also exposed to inflation/deflation risk in Mexico.

 

27

MAG SILVER CORP.

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended March 31, 2020 and 2019

(Expressed in thousands of US dollars unless otherwise stated)

 

Exposure to currency risk

 

As at March 31, 2020, the Company is exposed to currency risk through the following assets and liabilities denominated in currencies other than the functional currency of the applicable entity:

 

(in US$ equivalent)   Mexican peso    Canadian dollar 
           
Cash  $84   $282 
Accounts receivable   52    42 
Prepaid   17    - 
Investments   -    427 
Accounts payable   (137)   (228)
Lease obligations   -    (484)
Net assets exposure  $16   $39 

 

Mexican peso relative to the US$

 

Although the majority of operating expenses in Mexico are both determined and denominated in US$, an appreciation in the Mexican peso relative to the US$ will slightly increase the Company’s cost of operations in Mexico related to those operating costs denominated and determined in Mexican pesos. Alternatively, a depreciation in the Mexican peso relative to the US$ will decrease the Company’s cost of operations in Mexico related to those operating costs denominated and determined in Mexican pesos.

 

An appreciation/depreciation in the Mexican peso against the US$ will also result in a gain/loss before tax to the extent that the Company holds net monetary assets (liabilities) in pesos. Specifically, the Company's foreign currency exposure is comprised of peso denominated cash, prepayments and value added taxes receivable, net of trade and other payables. The carrying amount of the Company’s net peso denominated monetary assets at March 31, 2020 is 390 thousand pesos (March 31, 2019: 1.3 million). A 10% appreciation in the peso against the US$ would result in a gain before tax at March 31, 2020 of $2 (March 31, 2019: $7), while a 10% depreciation in the peso relative to the US$ would result in an equivalent loss before tax.

 

Mexican peso relative to the US$ - Investment in Juanicipio

 

The Company conducts the majority of its business through its equity interest in its associate, Minera Juanicipio (see Note 6). The Company accounts for this investment using the equity method, and recognizes the Company's 44% share of earnings and losses of Minera Juanicipio. Minera Juanicipio also has a US$ functional currency, and is exposed to the same currency risks noted above for the Company.

 

An appreciation/depreciation in the Mexican peso against the US$ will also result in a gain/loss before tax and deferred taxes (Notes 6 and 16) in Minera Juanicipio to the extent that it holds net monetary assets (liabilities) in pesos, comprised of peso denominated cash, value added taxes receivable, net of trade and other payables. The carrying amount of Minera Juanicipio’s net peso denominated monetary assets at March 31, 2020 is 311 million pesos (March 31, 2019: 113.1 million pesos). A 10% appreciation in the peso against the US$ would result in a gain before tax at March 31, 2020 of $1,470 (March 31, 2019: $526) in Minera Juanicipio, of which the Company would record 44% or $647 equity pick-up (March 31, 2019: $231), while a 10% depreciation in the peso relative to the US$ would result in an equivalent loss.

 

28

MAG SILVER CORP.

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended March 31, 2020 and 2019

(Expressed in thousands of US dollars unless otherwise stated)

 

In the three months ended March 31, 2020, the Mexican Pesos devalued against the US$ from 18.87 Pesos/US$ on December 31, 2019 to 24.29 on March 31, 2020, resulting in an exchange loss in Minera Juanicipio of $3,935 (the Company’s 44% share $1,731).

 

C$ relative to the US$

 

The Company is exposed to gains and losses from fluctuations in the C$ relative to the US$.

 

As general and administrative overheads in Canada are denominated in C$, an appreciation in the C$ relative to the US$ will increase the Company’s overhead costs as reported in US$. Alternatively, a depreciation in the C$ relative to the US$ will decrease the Company’s overhead costs as reported in US$.

 

An appreciation/depreciation in the C$ against the US$ will result in a gain/loss to the extent that MAG, the parent entity, holds net monetary assets (liabilities) in C$. The carrying amount of the Company’s net Canadian denominated monetary assets at March 31, 2020 is C$55 thousand (March 31, 2019: C$1.5 million). A 10% appreciation in the C$ against the US$ would result in gain at March 31, 2020 of $4 (March 31, 2019: $115) while a 10% depreciation in the C$ relative to the US$ would result in an equivalent loss.

 

(d)        Interest rate risk

 

The Company’s interest revenue earned on cash and cash equivalents is exposed to interest rate risk. A decrease in interest rates would result in lower relative interest income and an increase in interest rates would result in higher relative interest income.

 

12.       FINANCIAL INSTRUMENTS AND FAIR VALUE DISCLOSURES

 

The Company’s financial instruments include cash and cash equivalents, accounts receivable, investments, trade and other payables and lease obligation. The carrying values of cash and cash equivalents, accounts receivable, trade and other payables and lease liability reported in the consolidated statement of financial position approximate their respective fair values due to the relatively short-term nature of these instruments.

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value hierarchy establishes three levels to classify the inputs to valuation techniques used to measure fair value as described below:

 

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities.

 

Level 2: Observable inputs other than quoted prices in Level 1 such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

Level 3: Unobservable inputs which are supported by little or no market activity.

 

29

MAG SILVER CORP.

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended March 31, 2020 and 2019

(Expressed in thousands of US dollars unless otherwise stated)

 

The Company’s financial assets or liabilities as measured in accordance with the fair value hierarchy described above are:

 

   As at March 31, 2020
   Level 1  Level 2  Level 3  Total
Cash and cash equivalents  $70,327   $-   $-   $70,327 
Investments (Note 5)(1)   426    -    -    426 
   $70,753   $-   $-   $70,753 

 

   As at December 31, 2019
   Level 1  Level 2  Level 3  Total
Cash and cash equivalents  $72,360   $-   $-   $72,360 
Investments (Note 5)(1)   1,408    -    -    1,408 
   $73,768   $-   $-   $73,768 

 

(1) The fair value of equity securities quoted in active markets, is determined based on a market approach reflecting the closing price of each particular security as at the statement of financial position date. The closing price is a quoted market price obtained from the exchange that is the principal active market for the particular security, and therefore equity securities are classified within Level 1 of the fair value hierarchy. The fair values of equity securities and warrants that are not quoted in active markets are valued based on quoted prices of similar instruments in active markets or using valuation techniques where all inputs are directly or indirectly observable from market data and are classified within Level 2 of the fair value hierarchy.

 

There were no transfers between levels 1, 2 and 3 during the three months ended March 31, 2020 or during the year ended December 31, 2019.

 

13.       SEGMENTED INFORMATION

 

The Company operates primarily in one operating segment, being the exploration and development of mineral properties in Mexico. The majority of the Company’s long-term assets are located there and the Company’s executive and head office is located in Canada.

 

14.       RELATED PARTY TRANSACTIONS

 

The Company does not have offices or direct personnel in Mexico, but rather is party to a Field Services Agreement, whereby it has contracted administrative and exploration services in Mexico with MINERA CASCABEL S.A. de C.V. (“Cascabel”) and IMDEX Inc. (“IMDEX”). Dr. Peter Megaw, the Company’s Chief Exploration Officer, is a principal of both IMDEX and Cascabel, and is remunerated by the Company through fees to IMDEX. In addition to corporate executive responsibilities with MAG, Dr. Megaw is responsible for the planning, execution and assessment of the Company’s exploration programs, and he and his team developed the geologic concepts and directed the acquisition of the Juanicipio Project.

 

30

MAG SILVER CORP.

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended March 31, 2020 and 2019

(Expressed in thousands of US dollars unless otherwise stated)

 

The Company incurred charges with Cascabel and IMDEX as follows for the three months ended:

 

    March 31,    March 31, 
    2020    2019 
           
Fees related to Dr. Megaw:          
Exploration and marketing services  $72   $74 
Travel and expenses   8    20 
Other fees to Cascabel and IMDEX:          
Administration for Mexican subsidiaries   14    17 
Field exploration services   41    88 
   $135   $199 

 

All transactions are incurred in the normal course of business, and are negotiated on terms between the parties which are believed to represent fair market value for all services rendered. A portion of the expenditures are incurred on the Company’s behalf, and are charged to the Company on a “cost + 10%” basis. The services provided do not include drilling and assay work which are contracted out independently from Cascabel and IMDEX. Included in trade and other payables at March 31, 2020 is $88 related to these services (March 31, 2019: $142).

 

Any amounts due to related parties arising from the above transactions are unsecured, non-interest bearing and are due upon receipt of invoices.

 

The Company holds various mineral property claims in Mexico upon which full impairments have been recognized. The Company is obligated to a 2.5% NSR royalty on the Cinco de Mayo property payable to the principals of Cascabel under the terms of an option agreement dated February 26, 2004, whereby the Company acquired a 100% interest in the property from Cascabel, and under the terms of assignment agreements entered into by Cascabel with its principals.

 

The immediate parent and ultimate controlling party of the consolidated group is MAG Silver Corp. (incorporated in British Columbia, Canada).

 

The details of the Company’s significant subsidiaries and ownership interests are as follows:

 

Significant subsidiaries of the Company are as follows:

 

Name Country of Incorporation Principal MAG's effective interest
Project 2020 (%) 2019 (%)
         
Minera Los Lagartos, S.A. de C.V. Mexico Juanicipio 100% 100%
Minera Pozo Seco S.A. de C.V. Mexico Cinco de Mayo 100% 100%

 

Balances and transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation and are not disclosed in this note.

 

Minera Juanicipio, S.A. de C.V. (“Minera Juanicipio”), created for the purpose of holding and operating the Juanicipio Property, is held 56% by Fresnillo plc (“Fresnillo”) and 44% by the Company through Minera Los Lagartos, S.A. de C.V. Fresnillo is the operator of Minera Juanicipio, and with its affiliates, beneficially owns 11.3% of the common shares of the Company as at March 31, 2020, as publicly reported. Minera Juanicipio is governed by a shareholders agreement. All costs relating to the project and Minera Juanicipio are required to be shared by the Company and Fresnillo pro-rata based on their ownership interests in Minera Juanicipio (see Note 6).

 

31

MAG SILVER CORP.

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended March 31, 2020 and 2019

(Expressed in thousands of US dollars unless otherwise stated)

 

During the period, compensation of key management personnel (including directors) was as follows:

 

    March 31,     March 31,  
    2020    2019 
Salaries and other short term employee benefits  $285   $287 
Share based payments (Note 9(b), (c ), and (d))   254(1)   98 
   $539   $385 

 

(1)Includes $112 in DSUs granted to a new director of the Company in the three months ended March 31, 2020 (March 31, 2019: Nil).

 

Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Company, directly or indirectly, and consists of its Directors, the Chief Executive Officer and the Chief Financial Officer.

 

15.       COMMITMENTS AND CONTINGENCIES

 

The following table discloses the contractual obligations of the Company and its subsidiaries as at March 31, 2020 for committed exploration work and committed other obligations.

 

      Less than 1 year  1-3 Years  3-5 Years  More than 5 years
   Total  2020  2021-2022  2023-2024  2025 & over
                
Committed exploration expenditures  $-   $-   $-   $-   $- 
                          
Minera Juanicipio (1)&(2)   -    -    -    -    - 
                          
Other commitments   99    32    67    -    - 
Total Obligations and Commitments  $99   $32   $67   $-   $- 

 

1)Although the Company makes cash advances to Minera Juanicipio as cash called by the operator Fresnillo (based on approved Minera Juanicipio budgets), they are not contractual obligations. The Company intends, however, to continue to fund its share of cash calls and avoid dilution of its ownership interest in Minera Juanicipio.

 

2)According to the operator, Fresnillo, contractual commitments for processing equipment of $12,310 and for development contractors of $86,591 with respect to the Juanicipio Project on a 100% basis have been committed to as at March 31, 2020.

 

32

MAG SILVER CORP.

Notes to the Condensed Interim Consolidated Financial Statements

For the three months ended March 31, 2020 and 2019

(Expressed in thousands of US dollars unless otherwise stated)

 

The Company also has optional commitments for property option payments and exploration expenditures as outlined above in Exploration and Evaluation Assets. There is no obligation to make any of those payments or to conduct any work on its optioned properties. As the Company advances them, it evaluates exploration results and determines at its own discretion which option payments to make and which additional exploration work to undertake in order to comply with the funding requirements.

 

The Company could be subject to various investigations, claims and legal and tax proceedings covering matters that arise in the ordinary course of business activities. Each of these matters would be subject to various uncertainties and it is possible that some matters may be resolved unfavourably to the Company. Certain conditions may exist as of the date of the financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company is not aware of any such claims or investigations, and as such has not recorded any related provisions and does not expect such matters to result in a material impact on the results of operations, cash flows and financial position.

 

16.       INCOME TAXES

 

The income taxes recognized in profit or loss is as follows:

 

    March 31,    March 31, 
    2020    2019 
Deferred income tax (expense) benefit  $(8,694)  $319 
Total deferred income tax (expense) benefit for the period  $(8,694)  $319 

 

The $8,694 deferred tax expense recognized for the three months ended March 31, 2020 (March 31, 2019: $319 deferred tax benefit) is in relation to temporary differences between the book and tax base of its Mexican non-monetary assets, and specifically the tax base of the Company’s investment in Minera Juanicipio (Note 6). The tax base of this investment is determined in a different currency (Mexican Peso) than the book value based on the functional currency (US$), and changes in the exchange rate can give rise to temporary differences that result in deferred tax liability in accordance with IAS 12 Income Taxes. With the significant weakening of the Mexican Pesos against the US$ from 18.87 Pesos/US$ on December 31, 2019 to 24.29 on March 31, 2020, a deferred tax expense and a corresponding increase of the previously recognized deferred tax liability was recognized in the current period. The deferred tax expenses and the corresponding deferred income tax liabilities are non-cash items and will only be realized should the Company’s dispose of its shares in Minera Juanicipio.

 

17.        SUBSEQUENT EVENTS

 

Subsequent to March 31, 2020:

 

1.The Company closed a non-brokered private placement offering on April 30, 2020 and issued 4,528,302 common shares at C$13.25 for gross proceeds of C$60,000,002 (US$42,974) to Mr, Eric Sprott, through 2176423 Ontario Ltd., a corporation beneficially controlled by him; and,

 

2.The Company advanced $23,188 to Minera Juanicipio representing its 44% share of a $52,700 cash call to fund process plant construction and further underground development on the Juanicipio property.

 

 

33

 

Exhibit 99.2

 

 

 

 

 

 

 

 

 

MAG Silver Corp.  

 

Management’s Discussion & Analysis

For the three months ended March 31, 2020 and 2019

   
  Dated: May 15, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

A copy of this report will be provided to any shareholder who requests it.

 

 

 

VANCOUVER OFFICE

Suite 770

800 W. Pender Street

Vancouver, BC V6C 2V6

 

604 630 1399 phone

866 630 1399 toll free

604 681 0894 fax

   

TSX: MAG

NYSE American: MAG

www.magsilver.com

info@magsilver.com

 

MAG SILVER CORP.

Management’s Discussion & Analysis

For the three months ended March 31, 2020 and 2019

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

 

The following Management’s Discussion and Analysis (“MD&A”) focuses on the financial condition and results of operations of MAG Silver Corp. (“MAG”, “MAG Silver” or the “Company”) for the three months ended March 31, 2020 and 2019. It is prepared as of May 13, 2020 and should be read in conjunction with the unaudited condensed interim consolidated financial statements of the Company for the three months ended March 31, 2020 and the audited consolidated financial statements of the Company for the year ended December 31, 2019, together with the notes thereto which are available on SEDAR and EDGAR or on the Company website at www.magsilver.com.

 

All dollar amounts referred to in this MD&A are expressed in thousands of United States dollars (“US$”) unless otherwise stated. The functional currency of the parent, its subsidiaries and its investment in associate, is the US$.

 

The common shares of the company trade on the Toronto Stock Exchange and on the NYSE American Stock Exchange both under the ticker symbol MAG. MAG Silver is a reporting issuer in each of the provinces and territories of Canada and is a reporting “foreign issuer” in the United States of America. The Company believes it is a Passive Foreign Investment Company (“PFIC”), as that term is defined in Section 1297 of the U.S. Internal Revenue Code of 1986, as amended. This classification may result in adverse tax consequences for U.S. holders of the Company’s common shares. For an explanation of these effects on taxation, U.S. shareholders and prospective U.S. holders of the Company’s common shares are encouraged to consult their own tax advisers.

 

Qualified Person

 

Unless otherwise specifically noted herein, all scientific or technical information in this MD&A, including assay results and Mineral Resource estimates, if applicable, is based upon information prepared by or under the supervision of, or has been approved by Dr. Peter Megaw, Ph.D., C.P.G., a Certified Professional Geologist who is a “Qualified Person” for purposes of National Instrument 43-101, Standards of Disclosure for Mineral Projects (“National Instrument 43-101” or “NI 43-101”). Dr. Megaw is not independent as he is an officer and a paid consultant of MAG Silver (see Related Party Transactions below).

 

Cautionary Note Regarding Forward-Looking Statements

 

Certain information contained in this MD&A, including any information relating to MAG’s future oriented financial information are forward-looking statements within the meaning of the US Private Securities Litigation Reform Act of 1995 and applicable Canadian securities laws (collectively “forward-looking statements”). All statements in this MD&A, other than statements of historical facts are forward-looking statements, including statements regarding the anticipated time and capital schedule to production; expectations on the approval of the development of the project; estimated project economics, including but not limited to, mill recoveries, payable metals produced, production rates, payback time, capital and operating and other costs, Internal Rate of Return (“IRR”), anticipated life of mine, and mine plan; expected upside from additional exploration; expected capital requirements and adequacy of current working capital for the next year; and other future events or developments. Forward-looking statements are often, but not always, identified by the use of words such as “seek”, “anticipate”, “plan”, “continue”, “estimate”, “expect”, “may”, “will”, “project”, “predict”, “potential”, “targeting”, “intend”, “could”, “might”, “should”, “believe” and similar expressions. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results or events to differ materially from results projected in such forward-looking statements. Although MAG believes the expectations expressed in such forward-looking statements are based on reasonable assumptions, such statements are not guarantees of future performance and actual results or developments may differ materially from those in the forward-looking statements. Factors that could cause actual results to differ materially from those in forward-looking statements including, but not limited to, commodities prices; changes in expected mineral production performance; unexpected increases in capital costs; exploitation and exploration results; continued availability of capital and financing; risks related to holding a minority investment interest in the Juanicipio Property; and general economic, market or business conditions. In addition, forward-looking statements are subject to various risks, including but not limited to operational risk; environmental risk; political risk; currency risk; capital cost inflation risk; that data is incomplete or inaccurate; the limitations and assumptions within drilling, engineering and socio-economic studies relied upon in preparing the 2017 PEA (as defined herein); and market risks. The reader is referred to the Company’s filings with the SEC and Canadian securities regulators for disclosure regarding these and other risk factors. There is no certainty that any forward-looking statement will come to pass and investors should not place undue reliance upon forward-looking statements. MAG Silver does not undertake to provide updates to any of the forward-looking statements in this MD&A, except as required by law.

 

  2

MAG SILVER CORP.

Management’s Discussion & Analysis

For the three months ended March 31, 2020 and 2019

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

 

Assumptions have been made including, but not limited to, MAG’s ability to carry on its various exploration and development activities including project development timelines, the timely receipt of required approvals and permits, the price of the minerals produced, the costs of operating, exploration and development expenditures, the impact on operations of the Mexican Tax Regime, MAG’s ability to obtain adequate financing, outbreaks or threat of an outbreak of a virus or other contagions or epidemic disease will be adequately responded to locally, nationally, regionally and internationally. MAG Silver cannot assure you that actual events, performance or results will be consistent with these forward-looking statements, and management’s assumptions may prove to be incorrect. The forward-looking statements in this MD&A speak only as of the date hereof and we do not assume any obligation to update forward-looking statements if circumstances or management’s beliefs, expectations or opinions should change other than as required by applicable law. There is no certainty that any forward-looking statement will come to pass and investors should not place undue reliance upon forward-looking statements.

 

Note regarding Non-GAAP Measures

 

This MD&A references a technical report which presents certain financial performance measures, including all in sustaining costs (“AISC”), cash cost and total cash cost that are not recognized or standardized measures under International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”), and therefore may not be comparable to data presented by other silver producers. MAG Silver believes that these generally accepted industry measures are relevant indicators of potential operating performance. Non-GAAP financial performance measures should be considered together with other data prepared in accordance with IFRS. This MD&A contains non-GAAP financial performance measure information for a project under development incorporating estimated cost, pricing and other information that will vary over time as the project is developed and mined. It is therefore not practicable to reconcile these forward-looking non-GAAP financial performance measures to GAAP measures.

 

More information about the Company including its AIF and recent financial reports is available on SEDAR at www.sedar.com and on the U.S. Securities and Exchange Commission’s EDGAR website at www.sec.gov.

 

 

 

 

 

  3

MAG SILVER CORP.

Management’s Discussion & Analysis

For the three months ended March 31, 2020 and 2019

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

 

Cautionary Note to Investors Concerning Estimates of Indicated and Inferred Mineral Resources

 

This MD&A uses the terms "Indicated Mineral Resources” and “Inferred Mineral Resources".  MAG advises investors that although these terms are recognized and required by Canadian regulations (under National Instrument 43-101 Standards of Disclosure for Mineral Projects), the U.S. Securities and Exchange Commission does not recognize these terms.  Investors are cautioned not to assume that any part or all of the mineral deposits in these categories will ever be converted into Mineral Reserves. In addition, “Inferred Mineral Resources” are Mineral Resources for which quantity and grade or quality are estimated on the basis of limited geological evidence and sampling. Geological evidence is sufficient to imply but not verify geological and grade or quality continuity. “Inferred Mineral Resources” are based on limited information and have a great amount of uncertainty as to their existence and great uncertainty as to their economic and legal feasibility. An Inferred Mineral Resource has a lower level of confidence than that applying to an Indicated Mineral Resource and must not be converted to a Mineral Reserve. It is reasonably expected that the majority of “Inferred Mineral Resources” could be upgraded to “Indicated Mineral Resources” with continued exploration.  Under Canadian rules, estimates of Inferred Mineral Resources are considered too geologically speculative to have the economic considerations applied to them to enable them to be categorized as Mineral Reserves and, accordingly, “Inferred Mineral Resources” must not be included in the economic analysis, production schedules, or estimated mine life in publicly disclosed feasibility or pre-feasibility studies, or in the life of mine plans and cash flow models of developed mines. “Inferred Mineral Resources” can only be used in economic studies as provided under NI 43-101.  Investors are cautioned not to assume that part or all of an Inferred Mineral Resource exists, or is economically mineable.

 

Currently, there are no Mineral Reserves (within the meaning of NI 43-101) on any of the properties in which the Company has an interest. Only those mineral deposits that the Company can economically and legally extract or produce, based on a comprehensive evaluation of cost, grade, recovery and other factors, are considered Mineral Reserves. Although Fresnillo plc has made statements that “Mineral Reserves” exist at Juanicipio Project, they are not “Mineral Reserves” within the meaning of NI 43-101, and as such, no reliance should exist that they will in fact become “Mineral Reserves” within with meaning of NI 43-101.

 

 

1.DESCRIPTION OF BUSINESS

 

MAG is a Vancouver-based advanced stage development and exploration company that is focused on the acquisition, development and exploration of high-grade, district-scale projects located in the Americas. MAG’s principal asset is a 44% interest in the Juanicipio project (the “Juanicipio Project”) located in Zacatecas state, Mexico, which is now in the construction phase heading into production (see Juanicipio Project and Juanicipio Project Update below).

 

Juanicipio Project

 

MAG owns 44% of Minera Juanicipio S.A. de C.V. (“Minera Juanicipio”), an incorporated joint venture under the laws of Mexico, which owns the high-grade silver Juanicipio Project, located in the Fresnillo District, Zacatecas State, Mexico. Fresnillo plc (“Fresnillo”) is the project operator and holds the remaining 56% of Minera Juanicipio. Fresnillo and MAG as joint venture shareholders of Minera Juanicipio, jointly approved project mine development on April 11, 2019 and expect to commence production from the underground mine in mid-2020, with the processing facility or plant being commissioned mid-2021 (and reaching 85% of its 4,000 tonnes per day (“tpd”) nameplate capacity in Q4-2021). The initial production from the underground mine commencing in mid-2020 is expected to be processed in the Fresnillo plant until the Minera Juanicipio plant is completed (see Juanicipio Project Update below). The exploration, development and construction of the Juanicipio Project are all being carried out by the project operator, Fresnillo, with MAG participating in board, project review and technical committee meetings.

 

  4

MAG SILVER CORP.

Management’s Discussion & Analysis

For the three months ended March 31, 2020 and 2019

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

 

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. The Juanicipio Project underground mine development to date consists of approximately 27 kilometres (“km”) of ramps, with numerous cross-cuts across the Valdecañas vein now complete and installation of long term underground mine infrastructure well advanced. Surface construction is focused on the installation of the processing facility (plant) and all associated support infrastructure. All of the internationally sourced process equipment is located on the joint venture ground where the 4,000 tpd plant is being constructed. In addition, exploration continues on both the Valdecañas Vein system and on other prospective targets within the joint venture property boundaries.

 

On April 22, 2020, in response to the Mexican Government’s National COVID-19 order (see ‘COVID-19 – Juanicipio Project’ below), the Company announced a temporary suspension through May 30, 2020 of exploration and surface construction work. Further, underground operations have been temporarily reduced to a minimum working level under rigid hygienic protocols.

 

All joint venture programs (development and exploration) for the Juanicipio Project are designed and contracted by the Minera Juanicipio Technical Committee, which is represented by both MAG and Fresnillo, and approved by the Minera Juanicipio Board of Directors also represented by both parties. Construction of the processing plant is under the guidance of an Engineering, Procurement and Construction Management (“EPCM”) contract entered into with Fresnillo to oversee the mine construction and development. The Company’s share of project costs is funded primarily by quarterly cash calls through its 44% interest in Minera 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, and if either party does not fund pro-rata, their ownership interest will be diluted in accordance with the shareholders agreement.

 

Underground development commenced at the Juanicipio Project on October 28, 2013 and has focused to date primarily on advancing the ramp declines, ventilation raises, surface offices, surface and underground infrastructure, and preparing for expected mine production in mid-2020. MAG commissioned AMC Mining Consultants (Canada) Ltd. (“AMC”) to prepare a Resource Estimate and Preliminary Economic Assessment for the Juanicipio Project (collectively, the “2017 PEA”), which was completed according to the NI 43-101 Standards of Disclosure for Mineral Projects and announced by the Company on November 7, 2017 (see Press Release of said date), with the MAG Silver Juanicipio NI 43-101 Technical Report (Amended and Restated) filed on SEDAR on January 19, 2018.

 

The 2017 PEA incorporates major overall project upgrades over assessments conducted prior to 2017, on the Bonanza Zone, as defined in the 2017 PEA, 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 estimate of the Mineral Resources of the Juanicipio Project in the 2017 PEA were compiled using exploration data available only up to December 31, 2016 and does not include the results of drilling programs in 2017-2019 designed to further expand and infill the Deep Zone (see Exploration – Juanicipio Project below). The volume of these new 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 rock to the surface processing plant. An underground winze (internal shaft) is planned to be sunk within the hanging wall of the Valdecañas Vein system, to hoist mineralized rock from lower levels of the mine to the underground crusher and conveying system from the 6th year after plant start-up onward. As envisioned in the 2017 PEA, the proposed process plant has a planned production rate of 4,000 tpd, and the plant and tailings storage facility will be located in joint venture owned open, flat ground. It will include a SAG/Ball mill comminution circuit followed by sequential flotation to produce a silver-rich lead concentrate, a zinc concentrate and a gold-rich pyrite concentrate.

 

  5

MAG SILVER CORP.

Management’s Discussion & Analysis

For the three months ended March 31, 2020 and 2019

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

 

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 results in the 2017 PEA will be realized. In addition, the 2017 PEA was commissioned independently by MAG, and not by Minera Juanicipio. Fresnillo is the project operator and the actual development plan and timeline may be materially different from the scope, design and results envisaged in the 2017 PEA (see both ‘Mine Development Update – Juanicipio Project’ and ‘Risks and Uncertainties’ below).

 

Cinco de Mayo Project

 

A full impairment was recognized on the Cinco de Mayo property in Mexico in prior years, although the concessions are still maintained in good standing.

 

 

2.HIGHLIGHTS – MARCH 31, 2020 & SUBSEQUENT TO THE QUARTER END

 

üJoint Juanicipio Project update issued during the quarter (see Press Release dated February 24, 2020):
·announced that production from the underground mine was expected to commence ahead of schedule in mid-2020:
Mineralized material from the underground mine expected to be processed in the Fresnillo plant until the Juanicipio plant is commissioned;
Juanicipio plant expected to commence commissioning in mid-2021 and is expected to reach 85% of its 4,000 tonnes per day (“tpd”) nameplate capacity in Q4-2021;
Significantly faster ramp up expected than previously guided due to the de-risking of Juanicipio’s metallurgical performance by virtue of campaign processing the mineralized material through the Fresnillo plant;
·Estimated pre-operative initial capital now estimated at $440,000 (100% basis) as of January 1, 2018;
Less development expenditures incurred since then to March 31, 2020 of approximately $153,416 (Company therefore estimates approximately $286,584 of remaining initial capital on a 100% basis as at March 31, 2020); and,
Initial capital requirements to be reduced by both existing cash and other working capital held in Minera Juanicipio as at March 31, 2020 ($6,815 and $13,234 respectively), and by expected cashflow generated from mineralized material being processed through the Fresnillo plant commencing in mid-2020.

 

  6

MAG SILVER CORP.

Management’s Discussion & Analysis

For the three months ended March 31, 2020 and 2019

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

 

üDetailed engineering is near completion and earthmoving and foundation preparation is well advanced for the construction of the 4,000 tpd beneficiation plant.

 

üSAG and Ball mills, flotation cells, all associated vessels, thickeners and ancillary process equipment are now secured on site.

 

üProgress made with the construction of the flotation plant and infrastructure.

 

üUnderground development at Juanicipio has now approached 27 km (or 16.9 miles) and is focused on three sub-vertical ramps that descend alongside the mineralization and alongside the conveyor ramp to surface at plant site.

 

üAssays from a 33,864 metre, 28-hole 2019 exploration program released March 3, 2020, with the following highlights:
·Confirms and expands the continuous wide, high-grade mineralization in the Valdecañas Deep Zone;
·Confirms and expands the wide, high-grade zones in the Anticipada Vein;
·Confirms and expands the Venadas vein to the south with strong silver and gold grades; and
·Discovers the new northeast-trending Valentina and Venadas II veins through drilling and development.

 

üAppointed Selma Lussenburg a Director of the Company on February 1, 2020. Ms. Lussenburg is a business executive, former general counsel, corporate secretary and current board director with over 35 years of business experience. She has held various senior level positions encompassing a broad range of legal, governance, compliance, pension, safety & security and operational responsibilities.

 

üMAG held cash and cash equivalents as at March 31, 2020 (before the below noted private placement) of $70,327 while Minera Juanicipio had working capital on a 100% basis of $20,043 as at March 31, 2020.

 

üSubsequent to the quarter end, the Company announced that in response to a Mexican national COVID-19 order, surface construction work has been temporarily suspended, and the underground operation has been temporarily reduced to a minimum working level under rigid hygienic protocols:
·Temporary order is in effect until May 30, 2020; and,
·Fresnillo, the operator, has indicated there is no expected change to the overall development timetable.

 

üSubsequent to the quarter end, the Company announced a non-brokered private placement of 4,528,302 common shares of MAG to Mr. Eric Sprott, through 2176423 Ontario Ltd., a corporation beneficially controlled by him, at a price of C$13.25 per Common Share for gross proceeds of C$60,000,002 ($42,974).

 

 

  7

MAG SILVER CORP.

Management’s Discussion & Analysis

For the three months ended March 31, 2020 and 2019

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

 

3.JUANICIPIO PROJECT

 

Total Juanicipio Project expenditures incurred and capitalized directly by Minera Juanicipio (on a 100% basis) for the three months ended March 31, 2020 amounted to $19,343 (March 31, 2019: $10,093) of which $18,416 (March 31, 2019: $9,544) are development expenditures and the remaining $927 (March 31, 2019: $549) are exploration expenditures.

 

COVID-19 – Juanicipio Project

 

Subsequent to the quarter end, in response to the COVID-19 virus outbreak, the Mexican Government ordered a temporary suspension of all “non-essential” operations nationwide in Mexico, including mining operations, until May 30, 2020. The Company understands that Fresnillo, the operator of Juanicipio, has been in regular consultation with Mexican Government officials to determine the most appropriate compliance approach while attempting to minimize the overall impact on project development. Fresnillo has advised the Company that to date, surface exploration and construction work at Juanicipio has been temporarily stopped, and the underground operation has been temporarily reduced to a minimum working level under rigid hygienic protocols. The impact of these changes to the costs and time for the completion of development at Juanicipio is currently undeterminable, and could have a material adverse effect on MAG, its business, results from operations and financial condition.

 

Although Fresnillo stated on April 29, 2020 that it does not expect a change to the overall Juanicipio development timetable, the COVID-19 virus outbreak and current stoppages on surface exploration and construction work and current restrictions on underground development at Juanicipio could result in additional medical and other costs, project delays, cost overruns, and operational restart costs. 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 work markets and may affect the Company’s Business” in “Risk and Uncertainties” below.

 

The Juanicipio Project update discussed below reflects the ongoing activities on site through the quarter ended March 31, 2020 and prior to any temporary impact of the COVID-19 virus outbreak.

 

SURFACE CONSTRUCTION AND SITE PREPARATION – Juanicipio Project

 

Construction plans for the 4,000 tpd processing plant commenced immediately upon the formal project approval in April 2019. Basic engineering was completed during 2019 and as of the first quarter of 2020, detailed engineering is substantially complete. Development and construction of surface infrastructure facilities (power lines, access roads, auxiliary buildings, etc.) had already begun prior to the formal project approval and continued into 2020. The majority of all major equipment for the plant, including both SAG and ball mills is now secured on site. Flotation cells, processing tanks and other process equipment has also arrived and thickener tanks and drive and rakes fabrication are well advanced.

 

In the quarter ended March 31, 2020, further progress was made with construction of the flotation plant and other infrastructure. Earthmoving and foundation preparation continued for the construction of the processing plant and is now well advanced, as well as the completion of the haul road and main power supply transmission line. A large portion of the concrete works, structural steel sections and process pipe spools are being fabricated off-site in controlled workshop conditions. These will start arriving soon and be placed directly into position. As well, during the first quarter, a consulting firm was engaged to conceptually design the tailings dam.

  8

MAG SILVER CORP.

Management’s Discussion & Analysis

For the three months ended March 31, 2020 and 2019

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

 

UNDERGROUND DEVELOPMENT – Juanicipio Project

 

Access to the mine will be via twin underground declines that now have reached the top of mineralization in the Valdecañas Vein. From there, the upper footwall haulage/access drift has been driven the length of the vein from which three internal spiral footwall production ramps will extend to depth. Twinning of the original access decline was required to provide capacity for hauling additional mineralized rock and waste sufficient to facilitate processing capacity of 4,000 tpd. The twin ramps allow for streamlined underground traffic flow and increased safety through the mine having a second egress. The three spiral ramps into the mineralized envelope are designed to provide access to stopes within the mineralized material and were also required to facilitate the increase in planned mining rate to 4,000 tpd. The first cross-cuts through the vein have been made from the easternmost footwall ramp, exposing well-mineralized vein. Initial development indicates that the grade and width of the mineralization is in line with previous estimates.

 

Mineralized material from throughout the vein will be crushed underground and the crushed material conveyed directly from the underground crushing station (already excavated) to the process plant area via a third ramp, the underground conveyor ramp. The conveyor ramp is approaching 50% completion and is being driven both from the surface and from the 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 sinking of the two main ventilation shafts is progressing well, with one shaft at 20% completed and the other at 36% complete.

 

Underground development in the first quarter 2020 continued its 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 the first cross-cuts through the vein as the footwall ramps advance;
·constructing the underground crushing chamber;
·advancing the underground conveyor ramp to and from the planned surface processing facility from both faces;
·integrating additional ventilation and other associated underground infrastructure; and,
·sinking of the internal shaft – the head chamber for the shaft has been excavated, the shaft has been collared and winding equipment ordered.

 

Total underground development to date is now approximately at 27 km, including 2.1 km completed in the first quarter of 2020. A fourth underground contractor was appointed late in 2019 and was active in the quarter contributing to accelerated development rates. Mineralized material from development began being stockpiled during the quarter and is expected to be available for processing through the Fresnillo processing facility by mid-2020 (see Mine Development Update – Juanicipio Project below). In addition to the mineralized material from development, the first production stope is expected to be ready for mining in Q3-2020.

 

A photo gallery of current progress on the Juanicipio development is available at http://www.magsilver.com/s/PhotoGallery.asp .

 

 

  9

MAG SILVER CORP.

Management’s Discussion & Analysis

For the three months ended March 31, 2020 and 2019

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

 

MINE DEVELOPMENT UPDATE – Juanicipio Project

 

During the quarter on February 24, 2020, the joint venture shareholders jointly announced a project update.

 

It was previously expected that the completion of the processing plant would coincide with the readiness of the underground mine late in the fourth quarter of 2020. In the project update, it was announced that the underground mine is expected to commence production ahead of schedule in mid-2020, realizing commercial and operational de-risking opportunities for the joint venture. Meanwhile, the schedule for the construction of the processing plant has been adjusted to enable the most efficient use of contractor labour, and commissioning is now anticipated by mid-2021.

 

From mid-2020 until completion of the Juanicipio processing plant, mineralized material from development and initial production stopes is expected to be processed at the Fresnillo plant which has spare capacity. By bringing forward the start-up of the underground mine to mid-2020, the joint venture shareholders are looking to secure several positive outcomes for the project:

 

·generating some cash flow from production to offset some of the cash requirements of the initial project capital;
·de-risking the metallurgical process through a better understanding of the mineralization;
·increased certainty around the geological block model prior to start-up of the processing plant; and,
·allowing a quicker and more certain ramp-up to the nameplate 4,000 tonnes per day plant design.

 

The Juanicipio plant is now expected to reach 85% name plate capacity in Q4-2021 and 90-95% in 2022. In the 2017 PEA, ramp-up to full production was envisioned over 3 years after commissioning of processing plant.

 

With detailed engineering almost complete, major equipment purchases completed, and several significant construction contracts awarded or under review, the joint venture shareholders also announced an update to the capex required for the project. The pre-operative capital cost on a 100% basis of $395,000 from January 1, 2018 (see Press Release dated April 11, 2019) has been revised to $440,000 from January 1, 2018, to reflect additional expenditures incurred by Minera Juanicipio on the underground development and bringing forward the full construction costs for two large life of mine ventilation shafts, as well as some sustaining capital to facilitate the early underground mine start.  

 

The pre-operative initial capital already expended from January 1, 2018 to March 31, 2020 is approximately $153,416 leaving an estimated $286,584 of remaining initial capital (MAG’s 44% estimated remaining share is $126,097 as at March 31, 2020). This funding requirement would be reduced by both: existing cash and other working capital held in Minera Juanicipio as at March 31, 2020 ($6,815 and $13,234 respectively); and, expected cash flows generated from mineralized rock sold and processed through the Fresnillo processing plant commencing in mid-2020 (see Liquidity and Capital Resources below).

 

 

EXPLORATION – Juanicipio Project

 

Since the discovery of the Deep Zone as an extension at depth of the high-grade Bonanza Zone (see Press Release April 23, 2015), the Valdecañas Vein System has emerged as a multi-stage, high-grade vein swarm comprising the Valdecañas vein, characterized by large dilatant zones (bulges) in its east and western reaches (previously interpreted as the overlapping East and West Valdecañas Veins), the hangingwall Anticipada Vein, the Pre-Anticipada Vein, several en echelon splays and the family of northeast-trending cross veins that comprise the Venadas-Valentina Vein family. Last year’s 2019 drill results include the deepest lateral intercepts to date on the Valdecañas Vein, with deep mineralization now traceable continuously over a strike length exceeding 2,000 metres (“m”) and up to 1,100 m vertically from the top of the Bonanza Zone. Vein widths range from approximately 2 m to over 29 m. Deep mineralization on the Valdecañas Veins remains open laterally for several hundred metres to the claim boundaries on both ends; to the east claim boundary for Anticipada; and Pre-Anticipada and to depth across all veins (see diagrams with Press Release dated March 4, 2019 at http://www.magsilver.com/s/NewsReleases.asp?ReportID=846343).

 

  10

MAG SILVER CORP.

Management’s Discussion & Analysis

For the three months ended March 31, 2020 and 2019

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

 

Assays from 48 holes (46,060 m) designed to both convert the Inferred Mineral Resources included in the Deep Zone into Indicated Mineral Resources and further trace the Deep Zone laterally and to depth, were reported in 2019 (see Press Release dated March 4, 2019), and in the current quarter ended March 31, 2020, additional results from the 2019 28-hole (33,864 m) diamond drill program were announced (see Press Release dated March 3, 2020).

 

Valdecañas Deep Zone expanded and significant new hangingwall vein discovered

 

The 2019 drill results released on March 3, 2020, extend and confirm continuity to depth of high-grade mineralization in the East and West Valdecañas Vein Deep Zones and in the Anticipada Vein. Drilling in 2019 was not designed to extend the Pre-Anticipada vein. Drilling in 2019 did trace and confirm the northeast-trending Venadas vein some 800 m to the south. Drilling and development also coincidentally discovered two new northeast-trending cross veins, the Valentina and Venadas II veins.

 

Notably, many intercepts in the Valdecañas Deep Zone continue to demonstrate atypically high silver grades that MAG believes are ascribable to stacking or superimposition of mineralization related to a later deeper, boiling zone (mineralized horizon). As well, areas within the Deep Zone show extensive skarn and the increasing copper grades expected in the “root zone” (lower reaches) of an epithermal vein. Gold grades remain high and are remarkably consistent throughout the vertical extent of the Valdecañas Vein. These characteristics, interpreted in combination with other geological features, reflect proximity to a major mineralizing-fluid upwelling zone where multiple repeated pulses of mineralization combined to generate exceptionally high-grade and thick polymetallic mineralization. The search for additional mineralizing fluid upwelling zones within the Juanicipio Joint Venture property is ongoing, as each could be a centre of additional high-grade mineralization.

 

2019 28-hole (33,864 metre) diamond drill program – assays released March 3, 2020

 

The 2019 drill program expanded and upgraded the wide, high-grade Deep Zone and confirmed additional northeast-trending veins. Drill highlights (see Table 1 below):

 

·Confirm and expand continuous wide, high-grade mineralization in the Valdecañas Deep Zone;
·Confirm and expand the wide, high-grade zones in the Anticipada Vein;
·Confirm and expand the Venadas Vein to the south with strong silver and gold grades; and,
·Discover the northeast-trending Valentina and Venadas II veins through drilling and development.

 

Exceptional intercepts included:

 

Table 1 – Highlights 2019 Drill Program Assays

HOLE-
ID
From
(m)
2
To
(m)
TW 1
(m)
Silver
(g/t)
2
Gold
(g/t)
Lead
(%)
Zinc
(%)
Copper
(%)
VEIN
D5-12 989.45 997.00 5.7 3884 8.4 6.5 9.7 0.3 Valdecañas
D1-10 1038.85 1072.80 21.1 129 1.7 3.5 7.8 0.2 Valdecañas
D6-6 984.30 1017.55 21.2 147 1.2 3.9 8.8 0.3 Anticipada
D5-9 772.20 774.05 1.0 187 10.6 1.3 4.4 - Pre-Anticipada
93P 772.45 775.80 2.5 918 1.8 - - - Venadas
P32 569.20 572.10 1.2 279 0.7 - - - Venadas II
M39 560.95 564.95 0.7 1216 3.6 - - - Valentina

1 True widths (“TW”) were measured off cross sections

2 Abbreviations used: metres (“m”) and grams per tonne (“g/t”)

  11

MAG SILVER CORP.

Management’s Discussion & Analysis

For the three months ended March 31, 2020 and 2019

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

 

The discovery of more northeast-trending veins close to the planned production areas, coupled with the expanding high-grade Anticipada and Pre-Anticipada veins, should add significantly to the growing mineral endowment of the project and, importantly, provide considerable mining flexibility throughout an extended mine life.

 

A complete set of tables by vein of the 2019 drilling results are available at https://magsilver.com/site/assets/files/5810/nr-mar3-2020-table1-sdadds.pdf along with a new 3D video displaying the entire Valdecañas Vein system, available at https://magsilver.com/site/assets/files/5810/SSMovieHQ2_3-Mar3-2019-sdsawe.mp4.

 

Valdecañas Vein

 

Drilling in 2019 returned the thickest and deepest lateral intercepts to date on the Valdecañas Vein, with deep mineralization now continuous over a 2,000 m strike length and up to 1,100 m vertically from the top of the Bonanza Zone. The 2019 vein intercepts range in width from approximately 1 m to over 21 m (see Figure 2 and tables at https://magsilver.com/site/assets/files/5810/nr-mar3-2020-table1-sdadds.pdf) and the Valdecañas Vein remains open laterally to the claim boundaries at both ends and to depth. The best 2019 intercept is Hole D5-12, which cut 5.7m (true width) grading 3,884 g/t (113 ounces per ton (“opt”)) silver, 8.4 g/t (0.25 opt) gold, 6.5% lead, 9.7% zinc and 0.3% copper. This includes a 0.8m (true width) zone that ran 16,271 g/t (475 opt) silver, 9.2 g/t gold (0.27 opt), 17.8% lead, 11.8% zinc and 0.2% copper. The location of this intercept is important as it greatly expands the thick and high-grade eastern dilatant zone. Other significant holes include D1-5 and D1-10, both within the western dilatant zone, and D6-6 in the eastern dilatant zone. D5-11 also added very good width and grade above the east dilatant zone.

 

Anticipada Vein

 

The Anticipada Vein is sub-parallel to and lies 50-100m in the hangingwall of the Valdecañas Vein.  In 2019, it was coincidentally cut by 11 holes targeting the Valdecañas Vein and several of these intercepts significantly expand the vein.  This is especially the case in a vertical zone along its western reaches where it widens and higher grades appear (see Figure 3 and tables at https://magsilver.com/site/assets/files/5810/nr-mar3-2020-table1-sdadds.pdf). The best intercept is in Hole D6-6 and two other holes (D5-10 and D5-11) extend the well-mineralized zone on the eastern end of the vein. The remaining six holes tested the western limits of the vein and show moderate to relatively weak mineralization.  The Anticipada Vein remains open to depth and to the east.

 

New Vein Discoveries – 2019

 

Pre-Anticipada Vein

 

The Pre-Anticipada Vein (discovered and announced in Press Release, March 4, 2019) is also subparallel to the Valdecañas Vein and is located a further 50-100m into hangingwall above the Anticipada Vein. It was coincidentally cut by five infill holes targeting the Valdecañas Vein but their geometry was not favourable (see Figure 4 and tables at https://magsilver.com/site/assets/files/5810/nr-mar3-2020-table1-sdadds.pdf). The two easternmost holes (D5-8 and D5-9) cut appreciable silver and gold values within the coherent high-grade zone that characterizes the Pre-Anticipada Vein (See Figure 4) but do not significantly expand it. Pre-Anticipada remains open for 200-300 m to the eastern property boundary and to depth.

 

  12

MAG SILVER CORP.

Management’s Discussion & Analysis

For the three months ended March 31, 2020 and 2019

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

 

Venadas, Venadas II and Valentina Veins

 

Five surface drill holes from the 2019 program tested the Venadas Vein (see tables at https://magsilver.com/site/assets/files/5810/nr-mar3-2020-table1-sdadds.pdf), the first northeasterly-trending vein ever found in the Fresnillo District, to depth and to the south. The hole drilled farthest to the south (93P) extends the vein to 800 m from its intersection with the Valdecañas Vein and cut high silver and gold grades with no base metals (2.5 m (true width) grading 918 g/t (27 ounces per ton (“opt”)) silver and 1.8 g/t gold). Vein textures and the lack of base metals indicates this is a high-level intercept and that the vein should have good potential to depth. Hole 97P was the only hole drilled below 93P and it hit only a narrow, pinched-down vein. Additional deeper holes are planned for 2020 to determine where the vein opens up again at depth.

 

Importantly, two additional northeast-trending veins (Venadas II and Valentina; See tables at https://magsilver.com/site/assets/files/5810/nr-mar3-2020-table1-sdadds.pdf) were discovered during 2019 through a combination of drilling and being cut in development headings. Both had been suspected based on oblique angle vein intercepts in several holes directed towards the Valdecañas Vein. Drill hole P32, which was designed to intercept Venadas II on the way to Valdecañas, cut 1.2m (true width) grading 279 g/t (8 opt) silver; 0.7 g/t gold. The Valentina Vein was also cut multiple times by the eastern development ramp and a number of historic Valdecañas vein drill holes, the best of which is Hole M39 which cut 0.7m grading 1,215 g/t (35 opt) silver, and 3.6 g/t gold.

 

The intercepts for Venadas, Venadas II and Valentina lack significant base metal grades (with the exception of one intercept) indicating that these holes have likely cut the veins high in the mineralizing system. Also, all three veins have been intercepted on both the hangingwall and footwall side of the Valdecañas Vein in drill core and underground workings. This, combined with underground exposures of mineralized cross cutting northeast trending veinlets, strongly suggest that these veins cross-cut the main-stage of the Valdecañas Vein and may coincide with the long-recognized late gold-rich mineralization stage. Short-hole underground drilling and drifting is contemplated for fleshing out these veins and determining what relationship they have with the Valdecañas 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, 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 CIDT (Center for Investigation and Technical Development) of Peñoles in Torreon, 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.

 

  13

MAG SILVER CORP.

Management’s Discussion & Analysis

For the three months ended March 31, 2020 and 2019

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

 

4.OUTLOOK

 

While MAG’s principal focus is the successful development of the Juanicipio Project and to further explore the Juanicipio property, the Company continually looks to enhance its project portfolio by evaluating new available projects and through successful exploration of its current property holdings. However, MAG continues to execute its business plan prudently, with on-going project evaluations focusing primarily on potential high-grade, district scale opportunities.

 

Minera Juanicipio

 

Under the terms of an EPCM agreement, Fresnillo is now finalizing detailed engineering and is overseeing the construction of the 4,000 tpd process plant and associated surface infrastructure. In the quarter ended March 31, 2020, further progress was made with construction of the flotation plant and other infrastructure. Underground development to date at Juanicipio has now approached 27 kms with access to the upper portion of the resource now achieved. Initial development indicates that the grade and width of the vein is in line with previous estimates.

 

As noted above, a joint project update was issued by the joint venture shareholders during the quarter that announced that production from the underground mine was expected to commence ahead of schedule in mid-2020, and mineralized material from the underground mine is expected to be processed at the nearby Fresnillo plant (100% owned by Fresnillo) until the Juanicipio plant is commissioned. The Juanicipio plant will now commence commissioning in mid-2021 and is expected to reach 85% of its 4,000 tpd nameplate capacity in Q4-2021. An Operator Services agreement has been finalized which will become effective upon initiation of commercial production. As well, both lead and zinc concentrate off-take agreements were entered into by Minera Juanicipio with Met-Mex Peñoles, S.A. De C.V., under which both concentrates will be treated at market terms in Torreón, Mexico.

 

Although Fresnillo stated on April 29, 2020 that it does not expect a change to the overall Juanicipio development timetable, the COVID-19 virus outbreak and current stoppages on surface exploration and construction work and current restrictions on underground development at Juanicipio as discussed above (see COVID-19 – Juanicipio Project) could result in additional medical and other costs, project delays, cost overruns, and operational restart costs. 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 work markets and may affect the Company’s Business” in “Risk and Uncertainties” below.

 

According to Fresnillo, the Juanicipio development is expected to create approximately 2,750 jobs during construction and 1,720 jobs once at full production, with potential to scale-up operations in the future beyond 4,000 tpd.

 

On the exploration front, MAG and Fresnillo, as shareholders of Minera Juanicipio, both acknowledge that there is considerable further exploration opportunity in the concession license area as most of it remains unexplored. Exploration 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 the Deep Zone laterally and to depth. The 2019 exploration program also targeted the newly discovered north-south trending Venadas Vein family, and additional prospective targets are expected to be drilled in 2020 once exploration resumes after the COVID-19 national order has ended.

 

  14

MAG SILVER CORP.

Management’s Discussion & Analysis

For the three months ended March 31, 2020 and 2019

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

 

With the recent NE trending discoveries noted above, other much larger NE structures with intense surface alteration known farther afield within the Juanicipio property have become priority exploration targets. None have previously been drilled.

 

 

5.INVESTMENT IN JUANICIPIO

 

Minera Juanicipio

Minera Juanicipio is the corporate entity through which MAG Silver records and holds its Investment in Juanicipio (see Notes 2(b) and 6 in the unaudited condensed interim consolidated financial statements of the Company as at March 31, 2020).

 

   Three months ended March 31 
   2020   2019 
Joint venture oversight expenditures incurred 100% by MAG  $169   $86 
Cash contributions to Minera Juanicipio (1)   -    - 
Total for the period   169    86 
Equity pick up of current (loss) income for the period     (4,687)   282 
Balance, beginning of period   136,643    81,214 
Balance, end of period  $132,125   $81,582 

(1) Subsequent to the quarter ended March 31, 2020, the Company advanced $23,188 to Minera Juanicipio representing its 44% share of a $52,700 cash call to fund process plant construction and further underground development on the Juanicipio property.

 

During the three months ended March 31, 2020, the Company incurred Juanicipio oversight expenditures of $169 (March 31, 2019: $86) and made no joint venture cash advances (see Subsequent Events) to Minera Juanicipio (March 31, 2019: nil).

 

In the three months ended March 31, 2020, MAG recorded an equity loss pick up of $4,687 from its Investment in Juanicipio (March 31, 2019: $282 equity income pick up). There are no direct operating expenses in Minera Juanicipio, as development and evaluation and exploration expenditures are capitalized until commercial production is achieved. The $4,687 equity loss pick up for the period is the Company’s share of foreign exchange loss and deferred income tax expense, partially offset by interest income within Minera Juanicipio. The deferred tax expense was driven by the non-cash devaluation of certain tax assets within Minera Juanicipio, denominated in Mexican Pesos as the Mexican Peso devalued significantly against the US dollar in the quarter (from 18.87 Pesos/US$ on December 31, 2019 to 24.29 on March 31, 2020).

 

 

6.EXPLORATION AND EVALUATION ASSETS

 

Option Earn-in Projects

 

In 2017, the Company entered into an option earn-in agreement with a private group whereby MAG can earn up to a 100% interest in a prospective land claim package. There are no further exploration funding requirements under the agreement as at March 31, 2020. However, to earn a 100% interest in the property package, MAG would have to make combined remaining cash payments of $350 over the third, fourth and fifth annual anniversaries of the agreement (all payments are discretionary and at the option of MAG), at which time the vendors would retain a 2% net smelter returns royalty (“NSR”).

 

  15

MAG SILVER CORP.

Management’s Discussion & Analysis

For the three months ended March 31, 2020 and 2019

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

 

In late 2018, the Company entered into an option agreement with another private group whereby MAG has the right to earn 100% ownership interest in a company which owns a prospective land claim package. MAG paid $150 upon signing the agreement. To earn 100% interest in the property, MAG must make remaining cash payments of $1,850 over the next nine years and fund a cumulative of $30,000 of eligible exploration expenditures ($2,498 incurred to March 31, 2020) by 2028. Upon MAG’s 100% earn-in, the vendors would retain a 2% NSR.

 

Cinco de Mayo Project

 

A full impairment was recognized on the Cinco de Mayo property in Mexico in prior years, although the concessions are still maintained in good standing.

 

 

7.REVIEW OF FINANCIAL RESULTS

 

Three Months Ended March 31, 2020 vs Three Months Ended March 31, 2019

 

   Three months ended March 31 
   2020   2019 
EXPENSES        
Accounting and audit  $69   $58 
Amortization   30    27 
Filing and transfer agent fees   235    214 
Foreign exchange (gain) loss   (5)   46 
General office expenses   205    170 
Legal   141    86 
Management compensation and consulting fees   474    576 
Mining taxes and other property costs   7    296 
Share based payment expense   478    224 
Shareholder relations   111    104 
Travel   46    68 
    1,791    1,869 
Interest income   274    844 
Change in fair value of warrants   -    (18)
Equity pick up from Investment in Juanicipio   (4,687)   282 
Loss for the period before income tax   (6,204)   (761)
Deferred income tax expense   (8,694)   319 
Loss for the period  $(14,898)  $(442)

 

The Company’s net loss for the three months ended March 31, 2020 amounted to $14,898 (March 31, 2019: $442).

 

Management compensation and consulting fees decreased to $474 (March 31, 2019: $576) in the quarter ended March 31, 2020, while legal expense increased to $141 (March 31, 2019: $86) in the same period. Some corporate secretarial services performed by management in the prior year were performed by external counsel in the three months ended March 31, 2020.

 

  16

MAG SILVER CORP.

Management’s Discussion & Analysis

For the three months ended March 31, 2020 and 2019

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

 

Mining concession taxes and other property costs in the quarter ended March 31, 2020 decreased to $7 (March 31, 2019: $296) due to the Company’s divestiture of several non-core concessions in the prior year.

 

Share based payment expense (a non-cash item) recorded in the three months ended March 31, 2020 increased to $478 (March 31, 2019: $224) and is determined based on the fair value of equity incentives granted and vesting in the period. In the three months ended March 31, 2020, the Company granted 341,448 stock options (March 31, 2019: nil), 83,940 PSUs, (March 31, 2019: nil), and 39,063 RSUs (March 31, 2019: nil) under its equity compensation plans. As well, the Company granted 10,013 DSUs (March 31, 2019: nil) to a new director of the Company, and an additional 6,358 DSUs (March 31, 2019: nil) were granted to directors who elected to receive their retainer for the period in DSUs rather than in cash. The 2020 grants reflect 2019 equity incentives granted in 2020 due to a Company imposed blackout period in 2019.

 

Other expenses incurred during the quarter ended March 31, 2020 included accounting and audit of $69 (March 31, 2019: $58), amortization of $30 (March 31, 2019: $27), filing & transfer agent fees of $235 (March 31, 2019: $214), foreign exchange gain of $5 (March 31, 2019: $46 foreign exchange loss), general office expenses of $205 (March 31, 2019: $170), shareholder relations expenses of $111 (March 31, 2019: $104) and travel of $46 (March 31, 2019: $68), and were all either comparable with the prior period’s expense or the change was not significant to the overall operations during the period.

 

In other income and expenses, MAG earned interest income on its cash and cash equivalents of $274 (March 31, 2019: $844) during the quarter ended March 31, 2020, and recorded a 44% equity loss pick up of $4,687 (March 31, 2019: $282 equity income pick up) from Minera Juanicipio as described above in Investment in Juanicipio.

 

MAG recorded a deferred income tax expense of $8,694 for the quarter ended March 31, 2020 (March 31, 2019: $319 deferred income tax benefit), primarily driven by the non-cash devaluation of certain tax assets denominated in Mexican Pesos, as the Mexican Peso devalued significantly against the US dollar in the quarter (from 18.87 Pesos/US$ on December 31, 2019 to 24.29 on March 31, 2020).

 

Other Comprehensive Loss:

 

   Three months ended March 31 
   2020   2019 
         
Loss for the period  $(14,898)  $(442)
OTHER COMPREHENSIVE LOSS          
Items that will not be reclassified subsequently to profit or loss:          
Unrealized loss on equity securities, net of taxes   (651)   (147)
           
Total comprehensive loss  $(15,549)  $(589)

 

 

In Other Comprehensive Loss during the quarter ended March 31, 2020, MAG recorded an unrealized market loss of $651 (March 31, 2019: $147) on equity securities held as strategic investments.

 

  17

MAG SILVER CORP.

Management’s Discussion & Analysis

For the three months ended March 31, 2020 and 2019

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

 

8.SUMMARY OF QUARTERLY RESULTS

 

The following table sets forth selected quarterly financial information for each of the last eight quarters (as determined under IFRS (expressed in US$000’s except Net Income (Loss) per Share):

 

Quarter Ending Revenue (1) Net Income (Loss) (2) Net Income (Loss) per Share
March 31, 2020 $274 $(14,898) $(0.17)
December 31, 2019 $412 $(1,018) $(0.01)
September 30, 2019 $589 $(2,005) $(0.02)
June 30, 2019 $782 $(961) $(0.01)
March 31, 2019 $844 $(442) $(0.01)
December 31, 2018 $841 $(3,829) $(0.04)
September 30, 2018 $812 $597 $0.01
June 30, 2018 $783 $(2,753) $(0.03)

Notes:

(1)The Company’s only source of revenue during the quarters listed above was interest earned on cash, cash equivalents and term deposits. The amount of interest revenue earned correlates directly to the amount of cash, cash equivalents and term deposits on hand during the period referenced and prevailing interest rates at the time. MAG has no operating revenues at this stage of development.

 

(2)Net income (loss) by quarter is often materially affected by the timing and recognition of large non-cash expenses (specifically share based payments, exploration and evaluation property impairments, and deferred tax changes) as discussed above when applicable in “Review of Financial Results.”

 

 

9.CASH FLOWS

 

The following table summarizes MAG Silver’s cash flow activities for the quarter ended March 31, 2020:

 

   Three months ended March 31 
   2020   2019 
         
Cash flow from operations before changes in non-cash working capital  $(1,014)  $(724)
Changes in non-cash working capital   (602)   (375)
Operating activities   (1,616)   (1,099)
Investing activities   (470)   (414)
Financing activities   90    (22)
           
Effects of exchange rate changes on cash  and cash equivalents   (37)   (38)
           
Change in cash and cash equivalents during the period   (2,033)   (1,573)
Cash and cash equivalents, beginning of period   72,360    130,180 
Cash and cash equivalents, end of period  $70,327   $128,607 

 

  18

MAG SILVER CORP.

Management’s Discussion & Analysis

For the three months ended March 31, 2020 and 2019

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

 

Operating Activities

 

During the quarter ended March 31, 2020, MAG used $1,014 in cash for operations before changes in non-cash working capital, compared to $724 in the quarter ended March 31, 2019. MAG Silver’s non-cash working capital (accounts receivable, prepaid expenses less trade and other payables) in the quarter ended March 31, 2020 increased by $602 (March 31, 2019: $375). The total use of cash from operating activities in the quarter ended March 31, 2020 was $1,616 (March 31, 2019: $1,099).

 

Investing Activities

 

During the quarter ended March 31, 2020, the Company received proceeds of $331 (March 31, 2019: nil) from the sale of certain equity securities originally acquired as part of its divestiture of non-core concessions in prior years. During the quarter ended March 31, 2020, the net cash used in investing activities amounted to $470 (March 31, 2019: $414). The Company expended $172 on its own account on the Juanicipio joint venture project during the quarter ended March 31, 2020 (March 31, 2019: $81) and made no advances to Minera Juanicipio in the quarter (March 31, 2019: nil). Subsequent to the quarter end, the Company advanced $23,188 to Minera Juanicipio representing 44% of $52,700 cash call to fund the process plant construction and further underground development on the property. The Company makes capital contributions through cash advances to Minera Juanicipio as ‘cash called’ by operator Fresnillo, based on approved joint venture budgets. In the quarter ended March 31, 2020, MAG also purchased equipment totaling $5 (March 31, 2019: $13) and expended $624 (March 31, 2019: $320) on its other exploration and evaluation properties.

 

Financing Activities

 

In the quarter ended March 31, 2020, 15,000 stock options were exercised for cash proceeds of $106 (March 31, 2019: nil). In addition, 46,667 stock options (March 31, 2019: nil) were exercised under a less dilutive cashless exercise provision of the plan whereby 19,377 shares (March 31, 2019: nil) were issued and the remaining 27,290 stock options (March 31, 2019: nil) were cancelled. Offsetting the cash proceeds received from stock options, was cash used in financing activities to pay an office lease obligation of $16 (March 31, 2019: $22).

 

 

  19

MAG SILVER CORP.

Management’s Discussion & Analysis

For the three months ended March 31, 2020 and 2019

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

 

10.FINANCIAL POSITION

 

The following table summarizes MAG’s financial position as at:

 

   March 31, 2020   March 31, 2019 
         
Cash and cash equivalents  $70,327   $128,607 
Other current assets   794    822 
Total current assets   71,121    129,429 
Investments   426    1,616 
Investment in Juanicipio   132,125    81,582 
Exploration and evaluation assets   7,911    4,002 
Property and equipment   747    573 
Total assets  $212,330   $217,202 
           
Current liabilities   678    1,418 
Non-current liabilities   11,370    2,302 
Total liabilities   12,048    3,720 
Total equity   200,282    213,482 
Total liabilities and equity  $212,330   $217,202 

 

Total current assets decreased from $129,429 at March 31, 2019 to $71,121 as at March 31, 2020. Cash and cash equivalents totaled $70,327 at March 31, 2020 compared to $128,607 at March 31, 2019, with the decrease primarily a result of ongoing investment in Juanicipio. Other current assets as at March 31, 2020 included prepaid insurance and other expenses of $700 (March 31, 2019: $555) and accounts receivable of $94 (March 31, 2019: $267). The accounts receivable is comprised primarily of value-added refundable taxes.

 

Investments of $426 are comprised of equity securities held by MAG acquired either as strategic investments or as part of its divestiture of non-core concessions in prior years. (March 31, 2019: $1,616 comprised of warrants and equity securities).

 

The Investment in Juanicipio balance increased from March 31, 2019 to March 31, 2020 from $81,582 to $132,125 and reflects MAG’s ongoing investment in Minera Juanicipio as discussed above in ‘Investing Activities’ and ‘Investment in Juanicipio.’ Exploration and evaluation assets as at March 31, 2020 increased to $7,911 (March 31, 2019: $4,002) reflecting exploration expenditures incurred on the properties described above in ‘Exploration and Evaluation Assets.’

 

Property and equipment increased from March 31, 2019 to March 31, 2020 from $573 to $747 and includes a right-of-use asset recognized under IFRS 16 and exploration camp and equipment.

 

Current liabilities at March 31, 2020 amounted to $678 (March 31, 2019: $1,418) and are attributable to accrued exploration and administrative expenses and the current portion of the IFRS 16 lease obligations referred to above. Non-current liabilities at March 31, 2020 of $11,370 (March 31, 2019: $2,302) include the non-current lease obligation of $408 (March 31, 2019: $508), $286 for a reclamation provision (March 31, 2019: nil) and a deferred income tax liability of $10,676 (March 31, 2019: $1,794), the later resulting from temporary timing differences between the book and tax base of its Mexican non-monetary assets.

 

 

  20

MAG SILVER CORP.

Management’s Discussion & Analysis

For the three months ended March 31, 2020 and 2019

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

 

11.LIQUIDITY AND CAPITAL RESOURCES

 

As at March 31, 2020, MAG had working capital of $70,443 (March 31, 2019: $128,011) including cash and cash equivalents of $70,327 (March 31, 2019: $128,607) and subsequent to the quarter end, the Company closed a non-brokered private placement for gross proceeds of C$60,000,002 ($42,974) (see Subsequent Events). As well, as at March 31, 2020 Minera Juanicipio had working capital of $20,049 (MAG’s attributable 44% share $8,822) including a cash balance of $6,815 (MAG’s attributable 44% share $2,999). Other than an office lease obligation under IFRS 16, MAG currently has no long-term debt.

 

The Company is not currently generating any cash flow from operations. Although Minera Juanicipio intends to commence processing mineralized material through Fresnillo’s plant in mid-2020 until its own processing facility is commissioned in mid-2021, the expected cash flow from this commercial venture will off-set, but not likely fulfill the required future cash calls in respect to funding its 44% share of the Juanicipio Project. Therefore, the Company may require additional capital in the future to meet its future project and other related expenditures. Future liquidity therefore depends upon the Company’s ability to arrange debt or additional equity financings. The Company is continually evaluating both debt and equity financing alternatives. The Company closed a non-brokered private placement on April 30, 2020 subsequent to quarter end and issued 4,528,302 common shares at C$13.25 for gross proceeds of C$60,000,002 (US$42,974).

 

Funding of the Juanicipio Project Development

 

The initial capital expenditure requirements for the Juanicipio Project, as revised and announced by the joint venture shareholders on February 24, 2020 is estimated as of January 1, 2018 to be $440,000 (100% basis) including all mine development-related costs to be incurred prior to the envisaged commencement of commercial operations in mid- 2021. Capital costs incurred after commercial production are assigned to sustaining capital and are projected to be paid out of operating cash-flows.

 

This initial capital expenditure estimate of $440,000 does not represent the remaining initial capital expenditures as of the present date, as it does not reflect the capital expenditures incurred since January 1, 2018 which total approximately $153,416 to March 31, 2020. MAG therefore estimates the remaining initial capital expenditures on a 100% basis to be approximately $286,584 (MAG’s 44% share being $126,097 as at March 31, 2020), with the funding requirement to be reduced by both: existing cash and other working capital held in Minera Juanicipio as at March 31, 2020 ($6,815 and $13,234 respectively); and expected cash flows generated from mineralized rock sold and processed through the Fresnillo processing plant commencing in mid-2020 (see above Mine Development Update – Juanicipio Project).

 

As noted above in COVID-19 – Juanicipio Project, in response to the COVID-19 virus outbreak, mine development and construction at Juanicipio has been impacted by a Mexican Government temporary suspension order of all “non-essential” operations in Mexico to May 30, 2020. Fresnillo has advised the Company that to date, surface exploration and construction work at Juanicipio has been temporarily suspended, and the underground operation has been temporarily reduced to a minimum working level under rigid hygienic protocols. Although Fresnillo has stated that it does not expect a change to the overall Juanicipio development timetable, the impact of this order on development of the mine cannot be fully assessed because of the uncertainties surrounding its tenure and application. The COVID-19 virus outbreak and current stoppages on surface exploration and construction work and current restrictions on underground development at Juanicipio could result in additional medical and other costs, project delays, cost overruns, and operational restart costs. 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.

 

  21

MAG SILVER CORP.

Management’s Discussion & Analysis

For the three months ended March 31, 2020 and 2019

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

The Company may need to raise additional capital in the future in order to meet its full share of initial capital required to develop the Juanicipio Project, and accordingly, future liquidity may depend upon its ability to arrange debt or additional equity financings. The inability of MAG to fund its 44% share of cash calls would result in dilution of its ownership interest in Minera Juanicipio in accordance with the shareholders’ agreement.

 

Actual vs Expected Use of Proceeds – Prior Financing

 

In the Company’s February 23, 2016 Prospectus Supplement to a Short Form Base Shelf Prospectus (the “Offering Document”), MAG provided the expected use of proceeds with respect to the offering. The table below provides a comparison of the Company’s estimated actual use of proceeds to date (including cash advanced for such purpose, but not necessarily expended yet at the project level), as compared to the use of proceeds presented in the Offering Document:

 

Intended Use of Proceeds Expected Use of Proceeds February 23, 2016 Estimated Actual Use of Net Proceeds to date
  (000s of $US)  (000s of $US) 
Exploration expenditures at the Juanicipio Property $5,000 $5,000
Development expenditures at the Juanicipio Property $50,000 $50,000
Development contingency at the Juanicipio Property $7,500 $7,500

 

MAG expended the funds in accordance with the February 23, 2016 Offering Document.

 

 

12.Contractual ObligationS

 

The following table discloses the contractual obligations of MAG and its subsidiaries as at March 31, 2020 for committed exploration work and other committed obligations.

 

       Less than
1 year
   1-3 Years   3-5 Years   More than
5 years
 
   Total   2020   2021-2022   2023-2024   2025 & over 
                     
Committed exploration expenditures  $-   $-   $-   $-   $- 
                          
Minera Juanicipio (1)&(2)   -    -    -    -    - 
                          
Other commitments   99    32    67    -    - 
Total Obligations and Commitments  $99   $32   $67   $-   $- 

 

1) Although MAG Silver makes cash advances to Minera Juanicipio as cash called by the operator Fresnillo (based on approved Minera Juanicipio budgets), they are not contractual obligations. MAG intends, however, to continue to fund its share of cash calls and avoid dilution of its ownership interest in Minera Juanicipio.

 

(2) According to the operator, Fresnillo, contractual commitments for processing equipment of $12,310 and for development contractors of $86,591 with respect to the Juanicipio Project on a 100% basis have been committed to as at March 31, 2020.

  22

MAG SILVER CORP.

Management’s Discussion & Analysis

For the three months ended March 31, 2020 and 2019

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

 

The Company also has optional commitments for property option payments and exploration expenditures as outlined above in Exploration and Evaluation Assets. There is no obligation to make any of those payments or to conduct any work on its optioned properties. As the Company advances the projects, it evaluates exploration results and determines at its own discretion which option payments to make and which additional exploration work to undertake in order to comply with the earn-in requirements.

 

MAG may provide guarantees and indemnifications in conjunction with transactions in the normal course of operations. These are recorded as liabilities when reasonable estimates of the obligations can be made. Indemnifications that the Company has provided include an obligation to indemnify directors and officers of the Company for potential liability while acting as a director or officer of the Company, together with various expenses associated with defending and settling such suits or actions due to association with the Company. The Company has a comprehensive director and officers’ liability insurance policy that could mitigate such costs if incurred.

 

 

13.SHARE CAPITAL INFORMATION

 

MAG Silver’s authorized capital consists of an unlimited number of common shares without par value. As at May 13, 2020, the following common shares, stock options, RSUs, PSUs and DSUs were outstanding:

 

  Number of Exercise Price or Remaining
  Shares Conversion Ratio Life
Capital Stock 91,150,297 n/a n/a
Stock Options 1,484,122 $9.28 - $17.55 0.1 to 4.8 years
Performance Share Units(“PSUs”) (1) 260,988 1:1 1.6 to 4.8 years
Restricted Share Units(“RSUs”) 45,729 1:1  3.9 to 4.8 years
Deferred Share Units (“DSUs”) (2) 570,285 1:1 n/a (2)
Fully Diluted 93,511,421    


 

(1) Includes 172,055 PSU grants where vesting is subject to a market price performance factor, each measured over a three-year performance period which will result in a PSU payout range from 0% (nil PSUs) to 200% (344,110 PSUs) and 27,980 PSU grants where vesting is also subject to market price performance factor, measured over a three-year performance period with PSU payout target range from 50% (13,990 PSUs) to 150% (41,970 PSUs).

 

(2) To be share settled, but no common shares are to be issued in respect of a participant in the DSU Plan prior to such eligible participant’s termination date.

 

 

14.Other ItemS

 

The Company is unaware of any undisclosed liabilities or legal actions against MAG and MAG has no legal actions or cause against any third party at this time other than the claims of the Company with respect to its purchase of 41 land rights within the Cinco de Mayo property boundaries, and the associated efforts to regain surface access with the local ejido.

 

The Company is unaware of any condition of default under any debt, regulatory, exchange related or other contractual obligation.

 

 

  23

MAG SILVER CORP.

Management’s Discussion & Analysis

For the three months ended March 31, 2020 and 2019

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

 

Value Added Tax (“VAT”) also known as “IVA”

 

In Mexico, VAT is charged on the sale of goods, rendering of services, lease of goods and importation of the majority of goods and services at a rate of 16%. Proprietors selling goods or services must collect VAT on behalf of the government. Goods or services purchased incur a credit for VAT paid. The resulting net VAT is then remitted to, or collected from, the Government of Mexico through a formalized filing process.

 

The Company has traditionally held a VAT receivable balance due to the expenditures it incurs whereby VAT is paid to the vendor or service provider. Collections of these receivables from the Government of Mexico often take months and sometimes years to recover, but MAG has to date been able to recover all of its VAT paid. Minera Juanicipio also holds a VAT receivable balance, and the collections of these receivables, if not recovered on a timely basis, can be credited against VAT payable once Minera Juanicipio becomes a producing mine.

 

 

15.Trend InformatioN

 

As both the price and market for silver are volatile and difficult to predict, a significant decrease in the silver price and to a lesser extent gold, zinc and lead prices, could have an adverse material impact on the Company’s operations and market value.

 

The nature of MAG’s business is demanding of capital for property acquisition costs, exploration commitments, development and holding costs. MAG Silver’s liquidity is affected by the results of its own acquisition, exploration and development activities. The acquisition or discovery of an economic mineral deposit on one of its mineral properties may have a favourable effect on the Company’s liquidity, and conversely, the failure to acquire or find one may have a negative effect. In addition, access to capital to fund exploration and development companies remains difficult in current public markets, which could limit the Company’s ability to meet its objectives.

 

Surface rights in Mexico are often owned by local communities or “ejidos” and there has been a trend in Mexico of increasing ejido challenges to existing surface right usage agreements. The Company has already been impacted by this recent trend at its Cinco de Mayo Project. Any further challenge to the access to any of the properties in which MAG has an interest may have a negative impact on the Company, as the Company may incur delays and expenses in defending such challenge and, if the challenge is successful, the Company’s interest in a property could be materially adversely affected.

 

Apart from these and the risks referenced below in “Risks and Uncertainties,” management is not aware of any other trends, commitments, events or uncertainties that would have a material effect on the Company’s business, financial condition or results of operations.

 

 

16.RISKS AND UNCERTAINTIES

 

The Company’s securities should be considered a highly speculative investment and investors are directed to carefully consider all of the information disclosed in the Company’s Canadian and U.S. regulatory filings prior to making an investment in the Company, including the risk factors discussed under the heading “Risk Factors” in the Company’s most recent Annual Information Form (“AIF”) dated March 30, 2020 as amended and restated on April 23, 2020, available on SEDAR at www.sedar.com and www.sec.gov and incorporated by reference herein.

 

  24

MAG SILVER CORP.

Management’s Discussion & Analysis

For the three months ended March 31, 2020 and 2019

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

 

The volatile global economic environment has created market uncertainty and volatility in recent years. The Company remains financially strong and will monitor the risks and opportunities of the current environment carefully. These macro-economic events have in the past, and may again, negatively affect the mining and minerals sectors in general. The Company will consider its business plans and options carefully going forward.

 

In the normal course of business, the Company enters into transactions for the purchase of supplies and services denominated in Canadian dollars or Mexican Pesos. The Company also has cash and other monetary assets and liabilities denominated in Canadian dollars and Mexican Pesos. As a result, the Company is subject to foreign exchange risk on these currencies from fluctuations in foreign exchange rates (see Note 11(c) in the condensed interim consolidated financial statements of the Company as at March 31, 2020).

 

In addition, there is increasing environmental regulation as a result of public concern over climate change. The Company may have increased costs associated with the compliance of these regulation and a failure to comply may have a material adverse impact on the Company’s performance.

 

Juanicipio Development Decision

 

The actual scope, design and operating results of the Juanicipio Project may differ from the scope, design and results envisaged in the 2017 PEA. 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 results in the 2017 PEA will be realized. In addition, the 2017 PEA was commissioned independently by MAG, and not by Minera Juanicipio. Fresnillo is the project operator and the actual development plan and timeline may be materially different. As a result, there are additional risks as to the extent of capital and operating costs, mineral recovery and financial viability of the project.

 

Virus outbreaks may create instability in world markets and may affect the Company’s business.

 

MAG’s operations and the operations it has an interest in are subject to the risk of emerging infectious diseases or the threat of outbreaks of viruses or other contagions or epidemic diseases, including COVID-19. The current outbreak of COVID-19 that was first reported in Wuhan, China on December 31, 2019, and any future emergence and spread of similar pathogens, could have an adverse impact on global economic conditions which may adversely impact the Company’s operations, and the operations of the Company’s suppliers, contractors and service providers and may negatively impact future fiscal periods in the event of prolonged disruptions associated with the outbreak. The Chinese market is a significant source of global demand for commodities, including silver, gold and other metals. A sustained slowdown in China’s growth or demand, or a significant slowdown in other markets, in either case, that is not offset by reduced supply or increased demand from other regions could have an adverse effect on the price and/or demand for the Company’s products. COVID-19 and efforts to contain it, including restrictions on travel and other advisories issued may have a significant effect on metal prices and demand in China and other markets and potentially broader impacts on the global economy.

 

  25

MAG SILVER CORP.

Management’s Discussion & Analysis

For the three months ended March 31, 2020 and 2019

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

 

In response to the COVID-19 virus outbreak, the Mexican Government ordered a temporary suspension of all “non-essential” operations nationwide in Mexico, including mining operations, until May 30, 2020. The Company understands that Fresnillo, the operator of Juanicipio, has been in regular consultation with Mexican Government officials to determine the most appropriate compliance approach while attempting to minimize the overall impact on project development. Fresnillo has advised the Company that to date, surface exploration and construction work at Juanicipio has been temporarily stopped, and the underground operation has been temporarily reduced to a minimum working level under rigid hygienic protocols. These changes could have a material adverse impact on the Company as it could result in delays in the development timeline and increased costs. Any such delays could result in the failure to meet the previously announced timetable for beginning production and processing at Juanicipio. In addition, Mexican authorities could impose new or additional requirements resulting in further limitations on the activities, or the suspension of all activities, at Juanicipio. Alternatively, in the event of an outbreak of COVID-19 at Juanicipio, Fresnillo could determine that a full suspension of all of its operations is necessary for the safety and protection of the workers. A complete suspension of underground development at Juanicipio beyond the current reduced operations could result in further delays in the development of the project, result in additional increases in costs and have a material adverse effect on the financial position of the Company. If Mexican authorities were to extend the suspension order caused by the COVID-19 virus outbreak beyond May 30, 2020, or if there will be a full suspension of underground development at Juanicipio for an undefined period of time, there could be additional medical and other costs to be incurred, project delays, cost overruns, and operational restart costs. 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.

 

 

17.Off-Balance Sheet ArrangementS

 

MAG Silver has no off-balance sheet arrangements.

 

 

18.Related Party TransactionS

 

MAG does not have offices or direct personnel in Mexico, but rather is party to a Field Services Agreement, whereby it has contracted administrative and exploration services in Mexico, other than the Juanicipio Project, with MINERA CASCABEL S.A. de C.V. (“Cascabel”) and IMDEX Inc. (“IMDEX”). Dr. Peter Megaw, the Company’s Chief Exploration Officer, is a principal of both IMDEX and Cascabel, and is remunerated by the Company through fees paid to IMDEX. In addition to corporate executive responsibilities with the Company, Dr. Megaw is responsible for the planning, execution and assessment of the Company’s exploration programs, and he and his team developed the geologic concepts and directed the acquisition of the Juanicipio Project.

 

  26

MAG SILVER CORP.

Management’s Discussion & Analysis

For the three months ended March 31, 2020 and 2019

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

 

The Company incurred charges with Cascabel and IMDEX as follows for the three months ended:

 

         
   March 31,   March 31, 
   2020   2019 
         
Fees related to Dr. Megaw:          
Exploration and marketing services  $72   $74 
Travel and expenses   8    20 
Other fees to Cascabel and IMDEX:          
Administration for Mexican subsidiaries   14    17 
Field exploration services   41    88 
   $135   $199 

 

All transactions are incurred in the normal course of business, and are negotiated on terms between the parties which are believed to represent fair market value for all services rendered. A portion of the expenditures are incurred on the Company’s behalf, and are charged to the Company on a “cost + 10%” basis. The services provided do not include drilling and assay work which are contracted out independently from Cascabel and IMDEX. Included in trade and other payables at March 31, 2020 is $88 related to these services (March 31, 2019: $142).

 

Any amounts due to related parties arising from the above transactions are unsecured, non-interest bearing and are due upon receipt of invoices.

 

The Cinco de Mayo Project has a 2.5% NSR royalty payable to the principals of Cascabel under the terms of an option agreement dated February 26, 2004, whereby the Company acquired a 100% interest in the property from Cascabel, and under the terms of assignment agreements entered into by Cascabel with its principals.

 

Intercorporate Structure

 

The immediate parent and ultimate controlling party of the consolidated group is MAG Silver Corp. (incorporated in British Columbia, Canada).

 

The details of the Company’s significant subsidiaries and ownership interests are as follows:

 

Name Country of
Incorporation
Principal   MAG's effective interest
Project 2020 (%) 2019 (%)
         
Minera Los Lagartos, S.A. de C.V. Mexico Juanicipio (44%) 100% 100%
Minera Pozo Seco S.A. de C.V. Mexico Cinco de Mayo 100% 100%

 

Balances and transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation and are not disclosed in this note.

 

Minera Juanicipio, S.A. de C.V. (“Minera Juanicipio”), created for the purpose of holding and operating the Juanicipio Project, is held 56% by Fresnillo and 44% by the Company. Fresnillo is the operator of Minera Juanicipio, and with its affiliates, beneficially owns 11.3% of the common shares of the Company as at March 31, 2020, as publicly reported. Minera Juanicipio is currently governed by a shareholders agreement. All costs relating to the project and Minera Juanicipio are required to be shared by the Company and Fresnillo pro-rata based on their ownership interests in Minera Juanicipio.

 

  27

MAG SILVER CORP.

Management’s Discussion & Analysis

For the three months ended March 31, 2020 and 2019

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

 

During the period, compensation of key management personnel (including directors) was as follows:

 

         
   March 31,   March 31, 
   2020   2019 
Salaries and other short term employee benefits  $285   $287 
Share based payments   254 (1)   98 
   $539   $385 

 

 (1)Includes $112 in DSUs granted to a new director of the Company in the three months ended March 31, 2020 (March 31, 2019: Nil).

 

Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Company, directly or indirectly, and consists of its Directors, the Chief Executive Officer and the Chief Financial Officer.

 

 

19.CRITICAL ACCOUNTING ESTIMATES

 

The preparation of financial statements in accordance with IFRS, requires Management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenditures during the reporting period. Management has identified (i) mineral property acquisition and deferred exploration and evaluation costs, (ii) provision for reclamation and closure, (iii) deferred income tax provision (iv) share based payments, (v) equity investments, and (vi) financial instruments, as the main estimates for the following discussion. Please refer to Note 2 of the Company’s unaudited condensed interim consolidated financial statements as at March 31, 2020 for a description of all of the significant accounting policies.

 

Under IFRS, the Company defers all costs relating to the acquisition and exploration of its mineral properties (“exploration and evaluation” assets). Any revenues received from such properties are credited against the costs of the property until commercial production is achieved. When commercial production commences on any of the Company’s properties, any previously capitalized costs would be charged to operations using a unit-of-production method. The Company reviews and assesses when events or changes in circumstances indicate the carrying values of its properties may exceed their estimated net recoverable amount, and a provision is made for any impairment in value. IFRS also requires the reversal of impairments if conditions that gave rise to those impairments no longer exist.

 

The existence of uncertainties during the exploration stage and the lack of definitive empirical evidence with respect to the feasibility of successful commercial development of any exploration property does create measurement uncertainty concerning the estimate of the amount of impairment to the value of any mineral property. The Company relies on its own or independent estimates of further geological prospects of a particular property and also considers the likely proceeds from a sale or assignment of the rights before determining whether or not impairment in value has occurred.

 

  28

MAG SILVER CORP.

Management’s Discussion & Analysis

For the three months ended March 31, 2020 and 2019

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

 

Reclamation and closure costs have been estimated based on the Company’s interpretation of current regulatory requirements, however changes in regulatory requirements and new information may result in revisions to estimates. The Company recognizes the fair value of liabilities for reclamation and closure costs in the period in which they are incurred. A corresponding increase to the carrying amount of the related assets is generally recorded and depreciated over the production life of the asset.

 

The deferred income tax provision is based on the liability method. Deferred taxes arise from the recognition of the tax consequences of temporary differences by applying enacted or substantively enacted tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of certain assets and liabilities. The Company records only those deferred tax assets that it believes will be probable, that sufficient future taxable profit will be available to recover those assets.

 

Under IFRS 2 - Share-based Payments, stock options are accounted for by the fair value method of accounting. Under this method, the Company is required to recognize a charge to the statement of loss based on an option-pricing model based on certain assumptions including dividends to be paid, historical volatility of the Company’s share price, an annual risk free interest rate, forfeiture rates, and expected lives of the options. The fair value of performance share units awarded with market price conditions is determined using a risk-neutral asset pricing model, based on certain assumptions including dividends to be paid, historical volatility of the Company’s share price, a risk free interest rate, and correlated stock returns.

 

The Company may invest in equity investments for strategic reasons. In such circumstances, management considers whether the facts and circumstances pertaining to each investment result in the Company obtaining control, joint control or significant influence over the investee entity. In some cases, the determination of whether or not the Company has control, joint control or significant influence over the investee entities requires the application of significant management judgment to consider individually and collectively, a variety of factors.

 

Under IFRS 9 – Financial Instruments, the Company is required to value warrants that meet the definition of derivatives at fair value with unrealized gains and losses recognized in the statement of loss. To measure this fair value, warrants listed on a recognized exchange are valued at the latest available closing price. Warrants not listed on a recognized exchange, but where a secondary market exists, are valued at independent broker prices (if available) traded within that secondary market. If no secondary market exists, the warrants are valued using the Black Scholes option pricing model.

 

 

20.CHANGES IN ACCOUNTING STANDARDS

 

The Company has adopted the following new accounting pronouncements effective as at January 1, 2020:

 

IFRS 3 Business Combinations. On October 22, 2018, IASB issued narrow-scope amendments to IFRS 3 Business Combinations that intend to assist entities to determine whether a transaction should be accounted for as a business combination or an asset acquisition. The amendments include an election to use a concentration test. This is a simplified assessment that results in an asset acquisition if substantially all of the fair value of the gross assets is concentrated in a single identifiable asset or a group of identifiable assets. If a preparer chooses not to apply the concentration test, or the test is failed, then the assessment focuses on the existence of a substantive process. The amendments apply to businesses acquired in annual reporting periods beginning on or after January 1, 2020. The Company will apply these amendments to applicable acquisition transactions entered into after January 1, 2020.

 

 

  29

MAG SILVER CORP.

Management’s Discussion & Analysis

For the three months ended March 31, 2020 and 2019

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

 

21.CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

MAG Silver maintains a set of disclosure controls and procedures designed to provide reasonable assurance that information required to be disclosed in the reports that it is required to file or submit under applicable securities laws is recorded, processed, summarized and reported in the manner specified by such laws. The Chief Executive Officer and the Chief Financial Officer have evaluated, or caused to be evaluated under their supervision, the design and effectiveness of the Company’s disclosure controls and procedures as of March 31, 2020 through inquiry and review, as well as by drawing upon their own relevant experience. The Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective as at March 31, 2020.

 

Internal Control Over Financial Reporting

 

MAG Silver also maintains a system of internal controls over financial reporting, as defined by National Instrument 52-109 - Certification of Disclosure in Issuers’ Annual and Interim Filings in order to provide reasonable assurance that assets are safeguarded and financial information is accurate and reliable and in accordance with IFRS. The Company retains a third-party specialist annually to assist in the assessment of its internal control procedures. The Board of Directors approves the financial statements and MD&A before they are publicly filed and ensures that management discharges its financial responsibilities. The unaudited condensed interim consolidated financial statements and MD&A for the three months ended March 31, 2020 were approved by the Board on May 13, 2020. The Board’s review is accomplished principally through the Audit Committee, which is composed of independent non-executive directors. The Audit Committee meets periodically with management and auditors to review financial reporting and control matters.

 

The Chief Executive Officer and Chief Financial Officer have evaluated, or caused to be evaluated under their supervision, the design and effectiveness of the Company’s internal control over financial reporting as of March 31, 2020 based on the criteria set forth in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and have concluded that the Company’s internal control over financial reporting is effective.

 

There have been no changes in internal controls over financial reporting during the period ended March 31, 2020 that have materially affected, or are reasonably likely to materially affect, MAG’s internal control over financial reporting.

 

 

22.SUBSEQUENT EVENTS

 

Subsequent to March 31, 2020:

 

1.The Company closed a non-brokered private placement offering on April 30, 2020 and issued 4,528,302 common shares at C$13.25 for gross proceeds of C$60,000,002 ($42,974) to Mr. Eric Sprott, through 2176423 Ontario Ltd., a corporation beneficially controlled by him; and,

 

  30

MAG SILVER CORP.

Management’s Discussion & Analysis

For the three months ended March 31, 2020 and 2019

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

 

2.The Company advanced $23,188 to Minera Juanicipio representing its 44% share of a $52,700 cash call to fund the process plant construction and further underground development on the Juanicipio property.

 

 

23.ADDITIONAL INFORMATION

 

Additional information on the Company is available for viewing under MAG’s profile on the SEDAR website at www.sedar.com and on SEC’s EDGAR website at www.sec.gov.

 

 

 

 

 

 

 

 

 

 

 

 

 

31

 

 

Exhibit 99.3

 

Form 52-109F2
Certification of Interim Filings
Full Certificate

 

I, George Paspalas, President and Chief Executive Officer of MAG Silver Corp., certify the following:

 

1.Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of MAG Silver Corp. (the “issuer”) for the interim period ended March 31, 2020.

 

2.No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.

 

3.Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.

 

4.Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer.

 

5.Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings:

 

(a)designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that:

 

(i)material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and

 

(ii)information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and

 

(b)designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.

 

5.1Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

5.2ICFR – material weakness relating to design: N/A

 

5.3Limitation on scope of design: N/A

 

 

2

 

6.Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on January 1, 2020 and ended on March 31, 2020 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.

 

Date: May 15, 2020  
     
/s/ George Paspalas  
George Paspalas  
President and Chief Executive Officer  

 

 

 

 

 

 

 

 

 

 

 

Exhibit 99.4

 

Form 52-109F2
Certification of Interim Filings
Full Certificate

 

I, Larry Taddei, Chief Financial Officer of MAG Silver Corp., certify the following:

 

1.Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of MAG Silver Corp. (the “issuer”) for the interim period ended March 31, 2020.

 

2.No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings.

 

3.Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings.

 

4.Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer.

 

5.Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings:

 

(a)designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that:

 

(i)material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and

 

(ii)information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and

 

(b)designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP.

 

5.1Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 

5.2ICFR – material weakness relating to design: N/A

 

5.3Limitation on scope of design: N/A

 

 

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6.Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on January 1, 2020 and ended on March 31, 2020 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR.

 

 

Date: May 15, 2020  
     
/s/ Larry Taddei  
Larry Taddei  
Chief Financial Officer