In December 2021, I wrote a bullish article on SA about Mexico-focused silver mining company Discovery Silver (OTCQX:DSVSF) in which I said that the key figures in the updated Preliminary Economic Assessment (PEA) for the Cordero project looked compelling and the company was cheap.
Today, I think that the bull case for Discovery Silver looks even better as details are starting to emerge about the Preliminary Feasibility Study (PFS), which is expected to be completed by Q1 2023. The assays from Phase 2 drilling have been good and the metallurgy seems to be even better than expected. Thanks to this, the company plans to boost mill throughput by about a quarter, which should significantly improve costs. Let’s review.
Overview of the recent developments
In case you haven’t read my previous articles about Discovery Silver, here’s a brief description of the business. The company owns the Cordero silver-zinc-lead project in the state of Chihuahua near the USA, and I consider this to be among the best undeveloped mines in the silver space today. Cordero has 471 million ounces of silver equivalent resources, and the updated PEA in late 2021 showed a net present value (NAV) of $1.16 billion at $22 per ounce of silver. Annual production is expected to be around 26 million ounces of silver equivalent.
The mine life is 16 years, which is a lot considering nowadays you rarely see a silver mine with over a decade. The strip ratio is just 2.2:1 and the metallurgy is simple and clean, with sulfides recoveries of above 80% at a coarse grind. In addition, the topography is ideal for open pit mining and the project is located near a power line and a major road. However, the all-in sustaining costs (AISC) are estimated to be $12.35/oz of silver equivalent, which is a bit high. According to the updated PEA, the initial CAPEX is $368 million and there are about $80 million of pre-strip mining costs. In addition, a ball mill and a flotation circuit are expected to be added in year 3 when the mine starts processing sulfides (end of phase 1 mining in year 4). Discovery Silver also envisages investing $35 million in year 8 to expand the flotation circuit for higher zinc grades.
Overall, I think that Cordero is not a technically complicated project, and little could go wrong before it begins commercial operations, In my view, Discovery Silver should be trading at around 0.7x NAV. For comparison, exploration and development stage mining companies in the gold sector are rarely valued at above 0.5x NAV.
Discovery Silver plans to make a construction decision in 2024 after it completes a feasibility study, so stock dilution risk in the near term seems low. According to the October 2022 corporate presentation, the company has about C$55 million in cash (see slide 4 here).
Turning our attention to the key figures from the upcoming PFS, I think that they are likely to be much better than the ones from the PEA and become a significant catalyst for the share price. You see, Discovery Silver has a 55,000-meter drilling campaign budgeted for C$25 million ($18.6 million) this year, with over 30,000 meters focused on resource expansion.
The focus of the 14,000 meters of resource growth drilling is on the La Ceniza target, which is right next to the Cordero deposit.
I my view, the 2022 drilling results have been impressive so far, with recent highlights including 337 g/t of silver equivalent over 18 meters below the PEA pit, 328 g/t of silver equivalent over 46 meters, and 388 g/t silver equivalent over 33 meters outside the current resource. The PFS will be based on an updated resource estimate, and I expect measured and indicated resources to increase significantly, considering how much high-grade ore the company has been finding close to the PEA pit shell.
In addition, initial results from the PFS metallurgical testwork program showed that recoveries of 90-95% could still be achieved with lower reagent consumption at a very coarse grind size. Thanks to this, the PFS is likely to include higher recoveries over the life of mine and Discovery Silver plans to eliminate the heap leach circuit in phase 1. This should push down costs significantly.
Overall, mill throughput is expected to improve by 25% compared to the PEA, and combined with the lower reagent use, I think AISC could drop below $10 per ounce of silver equivalent. Unfortunately, inflation has pushed initial CAPEX estimates to about $450 million despite the removal of the heap leach circuit in phase 1.
Looking at the risks for the bull case, I think the major one is lower silver prices in 2024 as Discovery Silver is likely to be looking for funding to develop Cordero then. Silver prices are notoriously volatile, and rising interest rates around the world have been putting significant pressure on demand over the past few months. While silver is used by some investors to hedge against inflation, higher interest rates increase the opportunity cost of holding non-interest-bearing assets.
Cordero has come a long way since my first article about Discovery Silver and I expect the NPV in the PFS to increase significantly compared to the update PEA. Drilling results in 2022 have been good and recoveries are now expected to be higher. I think the release of the PFS results could become a significant catalyst for the share price.
Overall, I continue to think that Discovery Silver should be trading at around 0.7x NAV. However, silver prices are volatile, so I rate this one as a speculative buy. In case you like the bull case, keep in mind that the main listing of Discovery Silver is on the Toronto Stock Exchange.