Discovery Metals (DSV) - Cordero Bringing Size & Margin in Focus

Discovery Metals’ 100%-owned Cordero project is one of the world's largest undeveloped silver resources. Cordero is located in the Chihuahua State, a very active mining state in northern Mexico. 

The Company is currently advancing Cordero with the objective of defining a high-margin project with scale that retains excellent leverage to rising silver prices. The Company has a strong balance sheet and has excellent backing; it is part of the Oxygen Group of companies and Eric Sprott is its largest shareholder.

Discovery Metals is run by an enterprising management team,Taj Singh is driven, bright and ambitious and is ably supported by geologist Gernot Wober and they have an excellent share registry and market profile. They also have a strong balance sheet and over CAD$80M in cash.

Taj is keen to push the size of the system and explains why they are keen to re-do the previous PEA which had been commissioned by the previous management team. They want to work in a different way and feel that it may answer a few of the technical questions about how to mine this as a low cost operation. They are going to focus initially at the higher-grade core, and look at the approach to their 'mega pit', strip grade and feeders, and understanding the veins to be able to deliver a rigorous PEA 'PLUS'. 

Interview with Taj Singh, President & CEO of silver-developer, Discovery Metals (TSX-V: DSV).

We Discuss:

• 1:08 - Company Overview
• 2:31 - Business Model: Large & Small Grade VS Small & High Grade
• 5:46 - Reasons for Redoing the PEA & What it'll Change
• 14:37 - Focus, Capital, & Costs: What's Important Going Forward?
• 16:03 - Chasing High Grade: Risks, Rewards, & Process
• 23:55 - Involvement & Support of Large Shareholders
• 25:19 - Plan, Money, & Timing: Allocating $70M
• 29:24 - Telling the Story, Does the Market Care?
• 30:56 - Is Grade Always King?

Company Overview

Discovery Metals is focused on the world class Cordero Silver project, which is located in Northern Mexico. The project is one of the largest underdeveloped Silver resources in the world and they are currently focused on putting out a brand new resource in PEA which is looking at it in the scope of a higher-grade, more disciplined approach to the previous operator. They are working on the PEA and an aggressive drill programme with four drills going and the met testing has started. They have over CAD$80M in the bank so are all set and ready to be aggressive on it.

Location of the Cordero project, Mexico - Discovery Metals Corporate Presentation Oct. '20

The Cordero Silver project is a large mineralised system and one of the largest primary Silver projects in the world. It is an open pit mine which means the resource can be made larger still. Originally, it was thought that the project was large tonnage with a lower-grade which works for higher Silver prices. But Discovery is applying a more disciplined approach to a high-grade starter project which on it's own is a very sizable project. In addition to that, they’ve started working on some high-grade veins that potentially could be feeders to the open pit mineralisation and could be very complimentary to the open pit, which again could improve the economics of the project. So they have the optionality for a larger pit and can start with the high-grade pit. They can still mine the veins and have the optionality on the larger project, as capex is paid off and if Silver price increases.

The expansion potential at Cordero - Discovery Metals Corporate Presentation Oct. '20

Within the large project there's a core and Discovery has been testing whether the high-grade core is coherent, and can support its own project and they are now confident that there's a sizeable, high-grade core in there. That project would give much higher margins as it's a high-grade open pit. 

The mine is a primary Silver open pit mine where Silver basically accounts for about 60-65% of the revenues. There are other metals too which do have some effect. Gold accounts for about 5-10%, and the base metals, Lead Zinc account of the remainder. So, they are important but the primary driver behind this is Silver.

Discovery has been infill drilling since the last PEA and they can see from batch to batch the significant improvements, even in the area that was already drilled they are getting grade increases. The infill drilling, the open pit and the north quarter have added a lot of value for the company. The project is in a footprint of about 1.5km, the north quarter is quite well drilled compared to the sparsely drilled south quarter but they continue to drill across the whole property. 

New PEA

Discovery Metals is re-scoping the project. It's a huge system which has been drilled so there is a lot of data to be able to use and to mine. They have focused on higher cut off grades and within the big mega pit there's a high-grade open pit. They think that drilling can substantially improve it in terms of strip, grade and knowledge of the deposit. They’re getting to very high grades and they think it is a world class asset that just needs to be looked at from different viewpoints.

Discovery Metals is now applying geological constraints and structural constraints and is seeing some of that culminate in an improved resource. They are putting out a PEA but will have 75%- 80% of the resource being in indicated or above so it's closer to a PFS. The mine plan they put in the PEA will be 100% indicated. They are calling it a PEA+ because they are rebranding the project, so now the path to a PFS will be faster. They have the data, the resource is already at PFS level. They will be completely starting from scratch and all the holes, even the 300 old holes will be completely re-logged.

High-Grade Zone

Singh says that they are going after the high-grade zone first and they have allocated about CAD$10M for the drilling which works out at about CAD$200/m of core drilling. Out of the 55,000m of expanded project, they are about 32,000m – 33,000m through so have about 20,000m more left to drill. This will probably expand because they've been having very good success with the veins, and veins are drill intensive. The high-grade open pit is 2 areas with a north quarter and the south quarter. They are now really working on the south quarter and have seen some very significant improvements.

They have recently been drilling out the high-grade veins that are flanking the pit and have identified 4 major vein trends and several kinds of veins coming off that. They have now systematically started working and defining these veins and getting very encouraging results because these veins are actually the feeders to the high grade pit and then also to the mega pit. The veins are a lot more defined as you go to the north east, but the south west has higher open pit grades. 

Valuation and Shareholders

Singh thinks that now is an extremely attractive entry point for investors as it is a real story that's cashed up with a real asset. As they get towards the resource and PEA, they will be de-risking the project which will be very constructive for the share price with the news that they will be putting out. Singh is sure that this project will make money and will be very profitable at a reasonable Silver price for shareholders and other stakeholders too.

Eric Sprott is a very supportive shareholder but he is not involved in the day to day management of the business says Singh. Oxygen Capital has a couple of members on the board too which Singh says is great to keep the management focused.

Discovery has CAD$70M which has not been allocated but Singh says will be part of the equity capital of the build and so when Silver takes off they are ready for resource expansion and for future development as well. He says that Discovery is in a really good position and they are covered all the way through to construction and beyond.

So, Discovery Metals has CAD$80M, they’re doing a big drill programme, they have a new plan and will deliver a PEA+ at PFS level and every 3 to 4-weeks they’ll be putting out drill results to show what that high-grade open pit is looking like. They've just started a detailed met programme which will help de-risk the project. In addition, they are working on sustainability work, socioeconomic work, to support the studies beyond the PEA. They hope to have the PEA before the end of Q3/21.

To find out more, go to the Discovery Metals Website.