Oselote
Introduction
Discovery Silver (OTCQX:DSVSF) has been advancing a massive silver project in Mexico for several years. Development projects always are high risk because so many things can go wrong before reaching first pour. And then, once they reach first pour, they still need to hit their production and cost targets, along with a much higher silver price.
Long-term development plays are not my favorite place to find good risk-reward opportunities, but they can be lucrative if you get lucky. Ideally, I prefer development projects that are within two years of construction to reduce my risk. I think Discovery is very close to that window. They will release a feasibility study in early 2024 and attempt to also complete permitting in 2024. It's possible they could begin construction in 2024, although I expect it to slip to 2025.
If they do begin construction in 2025 and silver prices are over $50, their share prices should explode from current levels. Those are the types of opportunities that get my attention, regardless if it's a high-risk development project.
Comment from the company via email to me: As far as development projects go, Cordero is relatively low risk … there is existing infrastructure, the local topography is gentle, the deposit comes to surface (no pre-stripping), no acid generating rock, the process design is as simply as it gets, no waterways to deal with, no glacial tills/clays to deal with, etc.
They will have to overcome three hurdles. The first will be open-pit permitting, which is currently under scrutiny in Mexico. Some investors would say this risk alone is too high, but I'm confident that it will be permitted, or I wouldn't be writing this article. I have spoken to the IR rep and the CEO of Minera Alamos, who also is currently permitting an open-pit project in Mexico. Both are confident their permits will go through.
The second hurdle will be financing. We can never know how a project will be financed and how much it will hurt shareholders. The capex is high ($450 million) and will require a lot of share dilution. My worry is if the loan requires onerous covenants, such as hedging, or if they do a streaming deal that reduces their FCF.
The third hurdle is avoiding getting taken out by a larger company. Thankfully, Eric Sprott owns 25% of the company and knows the potential value of this project. I think this hurdle will be easily crossed.
I always like to point out that investing in PM miners is speculating. We're gambling since so many things can go wrong. My success rate on PM development stocks has been around 20%, which is not great, although the main reason for the low success rate is that most of them get acquired for low premiums (and there go the big returns). We're also betting that silver prices will go much higher, which is an assumption.
| Stock Name | Symbol (US) | Type | Category | Share Price (US) | FD Shares | FD Mkt Cap (6/24/2023) |
| Discovery Silver | OTCQX:DSVSF | Silver | Late Stage Development | $0.64 | 421M | $264M |
Company Overview
(Refer to the company's website for data mentioned in this article.)
Discovery Silver is advancing a large silver project (Cordero) in Mexico. Cordero has about 1.5 billion oz. of AGEQ (60 gpt), with significant offsets of lead, zinc, and gold. They're focusing on higher grades to improve the economics (about 500 million oz. at 90 gpt AGEQ). I'm valuing the company using only 500 million oz's of resources, but the other 1 billion oz's of resources could be used to expand production in the future.
They released a PFS in 2023. The capex increased to $450M. They plan to mine 33 million oz. (AGEQ) annually at around 90 gpt (AGEQ), with an AISC of around $13 (this will increase by the time they get to production). This is their starting pit, and production will likely increase.
The economics are surprisingly good for their low grade (this is because the project benefits from a low strip ratio, excellent metallurgy, and efficiencies from high throughput levels). The after-tax IRR is 28% at $22 silver. As long as silver prices are above $25, I think it can get financed. The payback is less than two years. Because of the high production, Cordero has huge leverage as silver prices rise. If silver is over $30, the payback period is only one year.
They have been finding higher grades and new discoveries on Cordero's large property (85,000 acres). They drilled 50,000 meters in 2021. Recent drill results have been excellent.
Feasibility study work will be ongoing through 2023, completing in early 2024. They also will be permitting in 2023-2024. We could have a construction decision as early as next year. Perhaps the first pour in 2026, but my guess is 2027.
The management team has an excellent track record. The CEO, Tony Makuch, was the guy who made Kirkland Lake a success. He also had success at Lakeshore Gold. Tony Esplin, the COO, spent more than 20 years at Newmont, successfully running some of the biggest gold mines in the world. They're ready to build this mine (refer to this recent podcast where the CEO provides an update). They have 35% insiders, with management and founders owning 10% of the shares and Eric Sprott with 25%. I don't think they will sell early and want to take this to production.
If we assume silver reaches $75, they could expand production to mine 1+ billion oz. Annual production could be massive. Let's assume they reach 35 million oz. of AGEQ annual production. That would generate free cash flow of around $1.5 billion per year. Using a 10x multiplier, that values the company at $15 billion. So, you can see how much leverage they have to higher silver prices.
Company Info
Cash: $64 million.
Debt: None.
Current Silver Resources: 500 million oz (80 gpt) AGEQ.
Estimated Future Silver Resources: 500 million oz (80 gpt) AGEQ.
Estimated Future Silver Production: 30 million oz AGEQ.
Estimated Future Silver All-in Costs (breakeven): $25 per oz AGEQ.
Scorecard (1 to 10)
Properties/Projects: 8.
Costs/Grade/Economics: 7.
People/Management: 8.
Cash/Debt: 7.
Location Risk: 6.5. Comment from the company via email: I think this score should be higher. We are in a region where they have been mining silver for more than 400 years. There are large operating mines/companies in the region. Our nearest local community is the town of Parral which has its own mining university. Despite the political rhetoric Mexico is still permitting mines. Agnico, a risk-averse company that only invests in top tier jurisdictions, recently invested US$580M in San Nicolas …. this in my mind provides strong confidence this will still be the case moving forward.
Risk-Reward: 7.5.
Upside Potential: 9.
Production Growth Potential/Exploration: 8.
Overall Rating: 7.5.