Discovery Silver: Unlocking Over $1 Billion In Value At Cordero (TSXV:DSV:CA)

Discovery Silver: Unlocking Over $1 Billion in Value at Cordero

Discovery Silver Corp. (OTCQX:DSVSF) is on the brink of developing a world-class silver deposit called Cordero, located in the state of Chihuahua, Mexico. With over 250 million ounces of silver reserves, Cordero is considered one of the largest silver deposits globally, making Discovery a highly attractive option for investors looking to capitalize on the potential growth of silver prices.

A preliminary economic assessment (“PEA”) study completed in November 2021 confirmed Cordero’s high potential to develop into a mine with a significant margin, size, and scalability. Additionally, the company has a strong financial position, with C$45 million in cash and no outstanding debt, which provides a solid foundation for continued exploration and project development at Cordero.

However, Discovery reported a couple of major new developments – the hiring of an experienced CEO and the release of a pre-feasibility study, noting the project’s $1+ billion post-tax value – that I expect to drive the stock price higher.

I delve into these developments, explore the company’s exploration plans for 2023, and provide an analysis of its valuation and potential risks.

New CEO Tony Makuch Has Done This Before

Discovery Silver has landed Tony Makuch, a well-respected and successful industry veteran, as its new CEO after serving as interim CEO since June 2022.

Makuch brings over 35 years of development, operational, and leadership experience to the table. He previously served as the CEO of Kirkland Lake Gold, where he helped it grow annual gold production from 315,000 oz to over 1.4 million ounces and increased market capitalization from approximately C$1 billion to over C$10 billion. The end result was a takeover by Agnico Eagle Mines (AEM). During his tenure, Kirkland Lake’s share price increased by over 500%, crushing the performance of the gold miners index (GDX).

I am thrilled to see Tony Makuch take the lead at Discovery Silver, as I had a profitable experience investing in Kirkland Lake Gold under his leadership between 2017 and 2020. In my opinion, Makuch is one of the top leaders in the mining industry.

Makuch has direct success in optimizing the value of development projects and large-scale operations like Cordero since that’s exactly what he did at Kirkland Lake Gold’s Macassa and Fosterville mines. This makes him a great fit for the company’s CEO position.

Makuch expressed his excitement in the company’s news release, calling Cordero a “once-in-a-lifetime opportunity.” He’s highly motivated to create value for all stakeholders as Discovery works to elevate Cordero to a tier-1 producing silver mine.

“The potential production of a large volume of silver at Cordero, combined with silver’s positive outlook as a crucial metal in the shift to green energy, presents a compelling chance that I couldn’t resist,” Makuch said.

Pre-Feasibility Study Reveals Exceptional Economics

Discovery Silver Corp. has recently released the results of its PFS for its Cordero project in Chihuahua, Mexico and the results are very promising.

The PFS demonstrates that the Cordero project has excellent project economics, with a Base Case after-tax NPV of US$1.2 billion (C$1.5 billion) and an Internal Rate of Return (“IRR”) of 28%.

However, those figures are based on conservative metals prices. Using spot prices ($23.87/oz silver and $1,925/oz gold), Cordero is valued at $1.72 billion with a 35.9% IRR.

Things get even more interesting with silver at $30 and gold at $2,000/oz, with its value exceeding $2 billion.

The PFS also shows a long mine life of 18 years, and average annual production of 33 Moz AgEq, representing an increase of approximately 40% in total AgEq ounces produced over the life of the project compared to the 2021 PEA study.

This production level would make Cordero one of the largest producing silver mines in the world. In fact, the annual production output from this single mine almost exceeds all of the production from multi-mine operators Hecla Mining (HL), Coeur (CDE), and First Majestic Silver (AG).

The PFS also confirms that the Cordero project has high margins and low capital intensity, with an average All-In Sustaining Cost (AISC) of $12.80/oz AgEq in Years 1 to 12, making it a profitable asset in nearly any silver price environment.

Finally, the initial development capital expenditure of $455 million is pretty low compared to the size and output of the mine, resulting in an attractive NPV-to-capital expenditure ratio of 2.5x (post-tax NPV divided by upfront capex).

Aggressive 2023 Exploration Plans

While the PFS confirmed a solid project, Discovery still has a lot of work to do at Cordero, and I believe there’s still a lot more value to be created.

Its 2023 drill plans include a 26,500-meter program, with 17,500 of those meters focused on engineering, hydrogeology, and geotechnical drilling to support the release of its feasibility study in 2024.

The 2024 feasibility study will definitely be Discovery’s next huge catalyst, outside of 2023 exploration results.

The FS will focus on increasing mine production efficiency, reducing processing costs, and improving metallurgical performance. It will also include a reserve update, further metallurgical test work, detailed mine scheduling, improved process design, and optimization of the tailing storage facility and hydrogeology.

Additionally, geotechnical and power studies will also be conducted to support permitting. These efforts aim to increase the potential of the project and surface additional value opportunities, the company says.

Ultimately, I think the upcoming FS for Cordero will enhance its economics, confirm its status as a top-tier project, provide more certainty on initial capital expenditure estimates factoring in new inflation data, and aid in obtaining funding.

What is Discovery Silver worth?

Determining the value of a pre-production company like Discovery Silver can be challenging, to say the least.

The recent PFS gives an insight into the potential value of the Cordero project, but it’s not a definitive way to measure the company’s worth.

However, as the company progresses Cordero to the feasibility and construction phase in the next year, I believe there is significant potential for a re-rating.

When comparing Discovery Silver to other companies like SilverCrest (SILV) and MAG Silver (MAG), which have successfully advanced Mexico-based silver projects to production, it becomes apparent that Discovery Silver may be undervalued.

For example, currently, the company trades at close to half its net asset value, while SilverCrest trades at a full net asset value.

As a producing silver miner, Discovery should command a higher valuation than its current value. Companies like Hecla and Coeur Mining, which produce a similar amount of silver per year compared to Cordero’s PFS estimates, are worth significantly more, with market caps of $3.8 billion and $1.2 billion respectively.

With a market cap of only $360 million, Discovery has significant room for growth.

Key risks and uncertainties

Investing in Discovery Silver stock comes with certain risks and uncertainties that potential investors should be aware of.

I’ve scanned through various corporate documents, including annual reports and MD&As, to present these risks to you. Some of these risks include:

• Silver price risk: The company is affected by fluctuations in the price of silver and equity securities. This is a highly leveraged silver stock, so a lower silver price negatively impacts the valuation of its Cordero project, and could make it harder to secure financing. Lower silver prices will also reduce the future mine’s profitability.

• Liquidity risk: Discovery is a pre-production company with no cash flow from operations, and it needs to raise money via equity financing to keep its business running. The company will need additional funding through the sale of shares or assets, which can lead to volatility in its stock price. There’s no guarantee it will be able to raise money at favorable terms in the future. Additionally, the company warns that a large shareholder holds 24.8% of shares, which could impact liquidity.

• Political risk: The company’s operations in Mexico are subject to laws and regulations that may change and impact exploration and production activities. Recent political changes in Mexico, such as the nationalization of the lithium industry, could also be a potential risk for the company. Mexico has also implemented a 7.5% royalty tax on mining companies, along with a .50% special tax on gold & silver miners, and there’s the risk that it may increase these rates in the future.

• OTC stock: The company’s U.S. listing trades on the OTC exchange, which can have a thinly traded market with wide bid-ask spreads, making it harder to trade.

Please read through Discovery’s annual report for more information on key risks and uncertainties.

Discovery Silver: The Final Word

Investing in Discovery Silver presents a unique opportunity for those looking to capitalize on the potential growth of silver prices.

• The company is on the verge of developing Cordero, one of the largest silver deposits in the world, boasting over 250 million ounces of silver reserves.

• With a solid financial foundation and a recent influx of positive developments, such as the appointment of a seasoned industry veteran as CEO and the release of a promising pre-feasibility study, the future looks bright.

• Makuch brings a wealth of experience and success to the table, having led Kirkland Lake Gold to significant growth and a market capitalization increase from C$1 billion to over C$10 billion during his tenure. His track record of optimizing the value of development projects and large-scale operations, such as Cordero, makes him an excellent fit for the company’s CEO position.

• The recent pre-feasibility study for Cordero confirms the project’s exceptional economics, with a base case after-tax NPV of US$1.2 billion and an Internal Rate of Return of 28%. Using current spot prices, Cordero’s value exceeds $2 billion, far exceeding Discovery’s current value and making it one of the most valuable silver projects in the world.

Of course, there are risks and uncertainties to consider before investing in Discovery Silver. But I think the potential rewards outweigh the potential risks right now.

The company’s strong financial position, positive developments, and the world-class Cordero project make Discovery Silver a compelling opportunity for silver bulls.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.