Discovery Silver Review
The bad news is, this company has all its eggs in one basket. The good news is that it is the largest undeveloped basket in the world. Will Discovery Silver be a 10-bagger or will it flop?
The Cordero Project
Discovery Silver has only one project, the Cordero mine. Located in western New Mexico near Chihuahua, the project is the largest undeveloped silver mine in the world. This will be an open pit mine at relatively low grades. There is a good chance the size of the deposit could increase significantly over time as exploration improves the asset, but for the purposes of this analysis we will assume the 600 million ounces of measured and indicated will constitute the entirety of the project.
https://discoverysilver.com/site/assets/files/6253/corporate-presentation-june-2024.pdf
First the bad news. The first port Cordero will not likely happen prior to 2025 or 2026. It is unlikely that the mine will produce anything of significance prior to 2027. A lot can happen to a mine's financial development in three to five years and most of it isn't good. Mining is hard. As an open pit mine the initial investment is significant at $600 million us, and a total investment of 1.4 billion us. Given the current size and market cap of the company that suggests it could be bought out by a larger player.
The good news... Mexico historically has been a favorable jurisdiction for mining albeit not without risk. The current politics don't leave us terribly comfortable, however, the economics of this project suggest much job creation, possibly up to 3000 or so. Money often solves ideological problems. The company is currently 35% owned by insiders. In addition, it has a serious investment by Eric Sprott. This suggests there could be some hesitancy selling the project for anything less than a premium.
They have completed a feasibility study.
After the initial capital expenditure, the mine is expected to produce silver at an all in sustaining cost of less than $13. For the purposes of our forecasts, we'll assume these costs will be inflated given the current economic environment. Either way, $13 is extraordinarily cheap.
Technicals
Discovery has no income streams of any significance; it is strictly burning cash right now. We need to confirm that the underlying silver price is in an uptrend and that the stock price is in an uptrend based on higher time frames.
During the last silver squeeze in 2020 discovery silver experienced about a 1000% increase edit share price. Given the long declining bull flag over the last three years symmetry suggests another 1000% could be in store depending on your entry price. However, a less greedy approach may be more prudent to consider. Nevertheless, the upside is there.
Zooming into the weekly chart, Discovery has printed an exceptionally well-defined descending channel part of the bull flag we see in the figure above.
Based on the chart alone, this is a very attractive entry point in our view.
BUY
Fundamentals
The “Rick Rule” Model
The “Rick Rule” Model is a “sum-of-the-parts” net present value calculation based on the forward strip of the futures price of silver, discounted a fixed rate of 8%, accounting for a recoverability rate of 78% of measured and indicated resources (600m oz with a annual production ramping to 33m lbs), allowing a significant discount for future CapEx, debt and/or equity dilution. In this analysis I present 3 cases: pessimistic, base case, and optimistic. In this case there is only one part, as we didn’t make and allowance for exploration or other assets.
Fundamental NAV evaluation:
BUY
Conclusion
While the 10-bagger possibility we see on the charts certainly is possible, the outcome of this project and price appreciation will largely be determined by how much pain the shareholders bear to fund the project.
At this point in the investment this is a venture position size, meaning most likely it's well less than 1% of most people's investment capital. In short, there is relatively high risk.
**Disclaimer:**
The information and outputs provided by this 5th generation finance model are for informational purposes only and should not be considered financial advice. While the model utilizes advanced techniques, financial markets are inherently complex and subject to unpredictable changes. Following the model's recommendations does not guarantee positive financial outcomes, and there is a possibility of financial loss.
**Important:**
* It is crucial to conduct your own independent research and due diligence before making any financial decisions.
* Consider seeking professional financial advice tailored to your specific circumstances.
* You are solely responsible for the investment decisions you make and the associated risks.
Nice deep dive - thank you!