Executive Summary
Discovery Silver Corporation (“DSC”) (OTCQX:DSVMF) (TSX:DSV) is a Canadian company that is advancing the Cordero project, a very large but low-grade silver deposit in the Chihuahua State of Mexico.
It was the subject of a valuation report by Crux Investor published in September 2020, which was based on information provided in a preliminary economic assessment (“PEA”) report dated April 2018, commissioned by the previous owner of the project (i.e. Levon Resources Limited), and a review of drilling results of DSC during the first half of 2019, which varied from wide, low-grade intersections, to very short high-grade intersections.
The 2020 Crux Investor report raised a number of concerns relating to the validity of the mineral resource estimation (“MRE”), the lack of support in illustrations for bulk mineable resources, metallurgical test work, very low operating and capital cost provisions, and the failure of follow-up drilling to change the perception of erratic mineralisation. Crux Investor’s cash flow model arrived at a value that was a fraction of the diluted Enterprise Value.
DSC has kept developing the Cordero project through drilling, updating the MRE, extensive additional metallurgical test work, and carrying out several economic assessments culminating in a feasibility study dated 16 February 2023 that arrived at an NPV5 of US$1.2 billion. Meanwhile, the share price has substantially tanked since the Crux Investor report almost halving the diluted Enterprise Value. With lots of de-risking and a much higher silver price, DSC could have become a good opportunity, the reason for Crux Investor to investigate and publish this update report.
From the geological description it is clear that DSC has refined its genetic model for the mineralisation, with the depth of emplacement being deepest in the northeast and reflected by the type of deposits, such as skarns and mantos, and increasingly shallower emplacement towards the southwest, where replacements, stockwork veining, and discordant veins are predominant. A district scale fault has downthrown the southwest block and brought it in direct contact with the much deeper emplaced northeast block.
The latest MRE could rely on a much denser dill spacing (generally 50 m) over the southwestern and central portion of the deposit. The coefficient of variation is generally low and the generated semi-variograms seem robust, which should provide comfort about the MRE. The cut-off grade was expressed in a net smelter royalty (“NSR”) value and US$7.25/t derived, roughly equal to 9 g/t Ag. Whereas the MRE should give comfort, illustrations through the block model are difficult to reconcile with the provided average grade. The validity of the genetic model that attributes much importance to the NW-SE trending faults as conduits for metals is also not apparent from the illustrations.
One of the criticisms of Crux Investor in its 2020 report was the lack of test work in support of the suggested metallurgical performance. This has been addressed in this study, which gives an exhaustive discussion of all studies carried out since the PEA. The report concludes that the derived flowsheet is robust, but with crushing, grinding, carbon pre-flotation, two flotation steps involving regrinding of concentrate before cleaning, and the need for extra drying, the process is not straightforward and will be relatively costly.
The Cordero project is planned to be constructed in several phases, something that seems to be adopted by a lot of mining companies lately. On paper, this may be beneficial, but in practice, it is not, with operational and project management getting in each other’s way. The probable motivation is to lower initial capital expenditure and the funding requirements of a small company.
Crux Investor has reviewed the capital expenditure forecast concluding that the provisions for a plant with an initial 9.6 million tonnes per annum (“Mtpa”) capacity are woefully low, worse even for the expansion to 19.2 Mtpa. Crux Investor has added US$632 million in total for plant construction. Benchmarking the suggested mining cost rate of US$2.0/t, excluding equipment financing, with other Mexican operations, indicates that this is reasonable. However, processing and General and Administrative (“G&A”) expenses needed substantial upward revision. The total effect is that the operating cost changed from US$14.26 for the Feasibility Study (“FS”) to US$19.02/t for this valuation. With these amendments, and applying the much higher spot metal prices as of 29 May 2024, the Crux Investor valuation arrives at an NPV8 of US$518 million, which is still lower than the US$777 million for the FS, partially because Crux Investor also recognises the 10% tax on repatriation of profits, and corporate expenses in Canada. Given the marginal nature of Cordero, the results are highly sensitive to changes in revenue, operating, and capital costs.
On 29 May 2024, the diluted Enterprise Value of DSC was US$319 million, so it seems the market also does not attach much weight to the FS valuation. The diluted Enterprise Value equals 62% of the NPV8 of this valuation. Whereas the DSC share price has lately risen on the back of the sharply improving silver price, the market is holding back on its re-rating. To give the reader an indication to the very leveraged nature of DSC, when Crux Investor completed its first draft of this report at the end of April 2024 when the spot silver price was US$27.7/oz, the diluted Enterprise Value exceeded the NPV8 by 36%.
The high tide has lifted all silver-focused mineral companies and glosses over many flaws. If one remains positive about the prospects of further silver price rises DSC is a good option as it is highly leveraged to this price. It is however a high-risk opportunity.
With the current NPV8 value equal to 60% of the required initial funding, DSC will find it hard to source the necessary funding at attractive terms.
In light of the above the DSC is fully valued, but a punter can make some further gains from riding the silver price cycle.
Introduction
Conclusions Crux Investor Valuation Dated 2020
Discovery Silver Corporation (“DSC”) (OTCQX:DSVMF) (TSX:DSV) is a Canadian company that is advancing the Cordero project, a very large but low-grade silver deposit in the Chihuahua State of Mexico.
It was the subject of a valuation report by Crux Investor published in September 2020, which was based on information provided in a PEA report dated April 2018, commissioned by the previous owner of the project, and a review of drilling results of DSC during the first half of 2019, which varied from wide, low-grade intersections to very short high-grade intersections.
The 2020 Crux Investor report raised a number of concerns relating to:
- The use of flawed conversion factors for Au, Pb and Zn to express these in Ag equivalent (“AgEq”) grade, ignoring payment terms that in practice reduce their influence;
- The high coefficient of variation (“CV”, being standard deviation/mean), especially for base metals, raising a concern about the validity of the MRE;
- The resource estimation resorted to indicator kriging instead of ordinary kriging, pointing to complexities in estimation, never a good sign;
- A cut-off grade that at the spot price at publication date converted to an in-situ value of only US$12/t;
- Cross sections through the block model showed that the +50 g/t AgEq blocks were widely dispersed and not mineable as a single consistent deposit, therefore being highly unlikely to be economic;
- Crux Investor had major reservations relating to metallurgical test work, mostly relating to the use of unrepresentative samples and the lack of cleaner flotation test work. Suggested recoveries could only be considered highly speculative; and
- The valuation was based on an impractical mine schedule fluctuating wildly over the life of mine (“LOM”), and assuming very low capital expenditure and operating costs. After revising these provisions substantially upwards Crux Investor arrived at a NPV7.5 of only US$176 million, far below the diluted Enterprise Value of US$519 million. In light of this Crux Investor deemed the valuation of Discovery Metals to be over the top.
DSC management had probably recognised that the deposit was too low grade to ever be economic, judging from the fact they embarked on the 2019 drilling campaign to better define, in their words “a shallow, higher-grade component that could redefine the Project entirely and vastly improve its economics”. The focus of the higher-grade component was northeast trending veins. Crux Investor recorded that it was a peculiar strategy to drill a very limited number of veins to establish their “sweetening” impact on the overall resources for two reasons:
- The aggregate volume of veins, which have a width of at most 2 m, would be extremely limited. At the most optimistic aggregate strike length of 4 km, and a depth extent of 300 m with an average width of at best 1.5 m, the potential tonnage contribution is less than 5 Mt, or 0.8% of the tonnage of 615 Mt within the resource pit outline; and
- Bulk mining narrow, high-grade structures, which are often in contact with waste, will result in high dilution of the vein grade, greatly diminishing their impact.
A review of the drill results reported by Discovery Metals showed these constituted less than 17% of the drill hole length, and had a weighted average grade of 79 g/t AgEq. The highlighted higher-grade results with a weighted average grade of 231 g/t AgEq. covers only 2% of the drill hole length.
Furthermore, a review of cross sections with new drill results only added to the pessimism about whether the mineral resource grade could be sweetened. On the contrary, it was hard to understand how a mineral resource could have been defined in the first place with a prospective waste strip ratio below 1.0, and the suggested average grades. Holes in close proximity to each other had often distinctly different grades and large sections of internal waste.
The conclusion was that the 2019 drilling did not change Crux Investor’s negative conclusion of the PEA review.
Subsequent Developments
Since the valuation report, DSC has continued drilling, allowing it to declare an updated MRE in October 2021, with 87% of the contained metal in the Measured and Indicated (“M&I”) resource categories. Resources were declared for Oxide/Transition material assumed to be processed by heap leaching, and Sulphide material assumed to be processed by milling and flotation to concentrates. The MRE was followed quickly by DSC’s own PEA, with an NPV5 of a whopping C$1.16 billion and an internal rate of return (“IRR”) of more than 38%.
Drilling continued in 2022 to support a pre-feasibility study (“PFS”), which was completed with an effective date of 20 January 2023, and published on 10 February 2023, at the time indicating an NPV5 of C$1.5 billion. Duly encouraged the company embarked on delivering a Feasibility Study (“FS”) in the first half of 2024. This involved further drilling, metallurgical test work, studies relating to geotechnical and hydrogeological conditions, process design, electrical power provision, and tailings dam design. The FS report, effective 16 February 2024, and published 28 March 2024, arrived at an NPV5 of US$1.2 billion (= approx. C$1.6 billion), remarkably consistent with previous studies.
Figure 1_1 shows the share price performance of DSC on the Toronto Stock Exchange (“TSX”) since April 2019, when the company first became involved in the Cordero project.
The graph shows great enthusiasm for the Cordero project after its acquisition, partially explained by market expectations for a boom period for silver. After the Crux Investor report, there was a sharp decline, which is not necessarily related to the report’s conclusions. Positive drill results during 2021 caused a rising price, but since reaching C$2.52 in May 2021 there has been a downward trend, despite the very positive economic assessments in the PFS and FS. Recently the improving silver price has propelled the price upwards to its current C$1.17.
At the current market capitalisation of US$338 million, the company trades at a huge discount to the NPV of US$1.2 billion of the FS, a good reason for Crux Investor to delve deeper into the company.
Historical Financial Performance
Table 2_1 summarises the annual financial performance since 1 September 2019, the first year of involvement in the Cordero project.
The table shows that the company has incurred outlays of C$99 million on operational management and C$45 million on investments to advance Cordero. With C$189 million raised, fully covered by equity funding, the cash balance rose by C$46 million to a very healthy C$51 million by 31 March 2024. The cash balance has been kept relatively constant between C$46 million and C$67 million since 2020. Management obviously likes to hold a large funding buffer, far in excess of the annual burn rate.
Review of the Cordero Project
Background
The technical information and illustrations in this section were drawn from two NI.43-101 compliant technical reports, one by M3 Engineering & Technology Corporation (“M3”) in support of a PEA dated 18 April 2018 and another by Ausenco Engineering Canada ULC (“Ausenco”) reporting on the findings of a FS, dated 28 March 2024.
Unless specifically stated otherwise all information, illustrations, and wording have been extracted from these reports.
The Cordero project is located in the State of Chihuahua in north Central Mexico, approximately 200 km south of the city of Chihuahua, and approximately 35 km northeast of the mining town of Hidalgo del Parral (Figure 3.1_1).
The project is accessed via State Highway 24, with the last 10 km to site being on a gravel road.
The Cordero property consists of 26 mining concessions totalling 34,909 hectares (“ha”). Figure 3.1_2 shows the extent and outline of the tenement area, with the blue outline indicating where the resources have been defined.
The mineral rights have largely been secured by staking contiguous lode claims that cover approximately 37,000 ha. Only one small claim to the southeast of 22 (and coloured grey) is owned by another party, but is deemed of no consequence by DSC since it is far from the area underlain by the resources.
A small area along the southern edge of the reserve pit is covered by a royalty of 1%.
DSC claims to have access agreements in place to the surface areas that are important for being able to conduct mining operations.
Geology and Mineralisation
The Cordero project covers a belt that presently consists of seven known igneous intrusive centres aligned within a northeast trend 15 km on strike and 3-5 km wide (Figure 3.2_1).
The mineralisation at Cordero is related to these porphyry style intrusives, which shallow systematically toward the southwest end of the belt, from outcropping in the northeast, to being emplaced at kilometre depth in the southwest. In the PEA the presented SW-NE longitudinal section showed the individual intrusives as stocks that were progressively deeper emplaced going southwest. In the FS report this interpretation has changed to the bottom illustration in Figure 3.2_1.
The thick black line (with associated green colour for a dyke) in the longitudinal section above denotes the location of the Mega Fault, a major district-scale structure, which has a large downthrow of the western block. This has brought the intrusive phases emanating from the large quartz monzonite stock (in orange colour) down and into contact with the previously much deeper quartz monzonite.
Mineralisation within the Cordero resource is porphyry related within the northeast dominantly manto and skarn type mineralisation (= calcareous rock altered by mineralising fluids) and to the southwest of the Mega Fault, replacement type, stockwork veining and discordant, through going veins (1 m - 2 m widths) with up to 500 m strike lengths.
Figure 3.2_2 shows the conceptual model for mineralisation before being affected by structural deformation.
The source of the mineralisation are intrusives. Faults, fractures and lithological contacts provide the structural preparation and plumbing network through which metals can travel easily over long distances, as long as the fluid temperature and pressure remain high enough to keep them dissolved in solution. The NE-transcurrent faults (e.g., the Cordero Fault) acted as major conduits to focus hydrothermal fluid flow, and have influenced the location of mineralisation. Lithologic contacts, where crossed at high angles by fault and fracture systems, have influenced metal deposition as well as the chemical influence, through the development of more permeable alteration sequences. Breccias formed from a variety of mechanisms that create opportunities for fluid pressure to drop, and for metals to precipitate at those locations. In addition, changes in the width or direction of open fractures, faults, and bends along lithologic contacts, and changes in lithologic competency (how easily the rock fractures) create favourable environments for the development of extensional dilation zones that enhance fluid flow as permeability increases along the strike of a fault- bend (“dilational jog”), but may also create the possibility for these favourable environments to become less favourable as fluid conduits that tighten up under compression.
From the above description it is evident that the controls for mineralisation at Cordero are multi-faceted and complex.
The minerals of economic interest are dominantly silver bearing galena (PbS), sphalerite, and pyrite (FeS2) present in roughly equal proportions. Other minerals associated with silver are stibnite (Sb2S3), tetrahedrite ({Cu,Fe,Zn,Ag}12,Sb4S13) and arsenopyrite (FeAsS). These antimony and arsenic containing minerals could spell metallurgical trouble for an operation.
Drill hole information shows that oxidation of sulphides is generally present within 2-60 m of the present surface. Some narrow fracture zones are oxidised to depths of +600 m. Oxidation could add to metallurgical complexity. At the transition from oxidised to fresh rock there can be supergene enrichment over a vertical distance of 40 m.
Mineral Resources
The Cordero MRE is based on 793 drill holes contributing 310,861 m of sampled intersections. Figure 3.3_1 shows a map with the localities of the holes of the various drill phases for the Cordero resources area. In the densely drilled sections of the project, the spacing between neighbouring drill holes typically averages just below 50 m. However, northeast of the Mega Fault an area with a footprint that is approximately one-third of the pit outline, drilling is very sparse.
For the geological model, only those faults demonstrating significant displacements were chosen as the primary bounding surfaces of fault blocks. Consequently, this process led to the delineation of twelve distinct fault blocks, each terminated by major geological structures. A lithology model was generated and incorporated into these fault blocks.
For the grade estimation, adjacent fault blocks were merged if they contained similar mineralisation, and were maintained as separate fault blocks if there was a clear break in grade at the boundary. This resulted in two estimation domains for oxide and three for sulphide. Each of these domains further comprises two sub-domains: a high-grade sub-domain and a medium to low-grade stockwork domain. The establishment of these sub-domains involved modelling of grade zones, utilising trends specific to each of the six primary domains. These trends were determined based on a 30 g/t AgEq cut-off grade and structural considerations derived from fault and vein orientations.
Figure 3.3_2 shows the six domains for sulphide mineralisation.
Using 2 m sample composites and after grade capping the coefficient of variability (= standard deviation/mean) was generally well below 2, which is excellent for ordinary kriging. Variography showed significant anisotropy with a prominent NE-SW trend. The obtained semi-variograms are robust as shown in Figure 3.3_3, which contains an example of silver grade variance along the major axis.
For all metals, spherical two-structure models were employed to fit the experimental semi-variograms.
A block model was created using blocks measuring 20 m in the X direction (NE-SW), 5 m in the Y direction (NW-SE), and 10 m in the Z direction (vertical).
The input parameters used for the constraining pit shells of the Cordero mineralisation to meet the “reasonable prospects for eventual economic extraction” requirement, used a cut-off grade of US$7.25/t net smelter return for sulphide resources. The metal prices assumed were US$24/oz Ag, US$1,800/oz Au, US$1.10/lb Pb, and US$1.20/lb Zn. Metallurgical recoveries and off-mine charges were taken into account, with a mining cost rate of US$1.59/t mined, processing cost of US$5.22/t treated, and G&A cost of US$0.86/t treated.
Using the above parameters Ausenco comes to the following factors to convert grades into AgEq grades:
- 15.52 for Au grade (in g/t);
- 31.15 for Pb grade (in %); and
- 34.68 for Zn grade (in %).
Converting the cut-off grade from a monetary value to Ag Eq cut-off grade by simplistically dividing the NSR cut-off grade (i.e. US$7.25) by the value of 1 g/t Ag (i.e. US$24/31.1) would make it 9.4 g/t.
Table 3.3_1 is the resource statement for the Cordero project, effective August 2023.
The table shows that oxide resources comprise a very small portion of total resources accounting for 8% of the AgEq ounces. Inferred resources are also a minor component of total resources, which implies that not much can be expected for dropping the strip ratio by converting these to M&I resources.
When referring to Figure 3.3_4, it is surprising that Measured Resources are larger than Indicated Resources, given its relatively small surface expression and that Inferred Resources comprise such a small proportion of overall resources.
The technical report includes a large number of validation measures that all show impressive results. Figure 3.3_5 for example shows the close correlation between composite values and block estimates. How the graph functions is however not clear, as any block value is informed by many composite values.
However, comparing various sections raises some questions.
Figure 3.3_6 shows the traces of cross sections for which there are illustrations included in the technical report. Crux Investor has made annotations to enlarge the numbering to make it more readable and has included traces from other maps in the report.
The longitudinal section through the block model in Figure 3.3_7 is provided in the technical report as an illustration of the bulk nature of the deposit. Considering that all colours warmer than green are above the cut-off grade, it is a convincing picture. However, the section was carefully chosen through the most mineralised portion of the deposit. Moreover, it seems that the section is not vertical, but rather inclined to the northwest, which is one of the dominant directions of the mineralisation.
Unfortunately, the longitudinal section does not include boreholes and their grade intercepts to allow for comparison between estimated block grade and composite grades. This is only available for cross sections along coordinates with the pre-fix “CPL” in Figure 3.3_6 for which there are also separately available cross sections through the block model, but with very four grade intervals, the highest for block grades exceeding 20 g/t AgEq.
Figure 3.3_8 to Figure 3.3_10 compare information in cross sections along the coordinate traces in Figure 3.3_6. The cross section at the top gives borehole intersections and geology, the middle illustration is a cross section through the block model with four grade intervals, and the bottom cross section again through the final block model, but with five grade intervals. The bottom cross sections have been inclined to the northeast, again aligning it more with the mineralisation and overstating the true nature of it.
The first noticeable aspect is the low grades associated with the Cordero Fault, which is in contradiction to the genetic model for mineralisation. Also noticeable are large sections with very spotty and low grades, which are not well reflected in the block model sections. Finally, both sets of sections through the block model are generally similar, but with the bottom ones giving a higher average grade impression. As the cross sections have been chosen through the best mineralised portion of the deposit, it is hard to understand how the reserves using a 10 g/t AgEq cut-off grade could have been defined with a strip ratio of only 2.0 : 1
Mineral Reserves
The reserve estimation is based on mining of the Cordero deposit by conventional open pit mining utilising a traditional drill, blast, load, and haul sequence to deliver mill feed to the primary crusher, and to waste dumps located to the north and south of the proposed pits. The pit design is based on a 10 m bench height to match the resource model bench height.
The estimation of Mineral Reserves uses a cut-off grade of US$10/t (i.e. approx. US$3/t higher than for the conceptual mineral resource pit) and includes only high-grade oxides up to a maximum of 15% of the mill feed to keep metallurgical performance stable. The metal prices assumed are US$20/oz Ag, US$1,600/oz Au, US$0.95/lb Pb and US$1.20/lb Zn, which generally compare very low to currently prevailing prices. However, the operating cost provisions also are low for the type of operation. The overall slope angles vary from 42 degrees to 52 degrees, which cannot be considered conservative.
The estimation of dilution assumes a skin for ore/waste contact dilution of 1.3 m on average for a 10 m bench height. The overall effect is an additional 2.4% plant feed at a grade that is approx. 2.7% lower.
Figure 3.4_1 is a longitudinal section approximately 300 m NW of section B-B’ in Figure 3.3_4 through the centre and highest grade portion of the reserve pit. The colours warmer than yellow are for grades above 30 g/t AgEq.
No pit optimisation results graph is presented in the technical report. The mineral reserves statement is given in Table 3.4_1 together with the conversion ratios from M&I mineral resources for tonnage, grades and metal content.
Of the precious metal in total resources, more than 61% is captured in the reserves at a grade that is approximately 35% higher. Whereas an increase in cut-off grade would account for some average grade increase, the larger increase in average grade than cut-off grade must partially be due to a different shape of the pit from the conceptual mineral resources pit.
The oxide reserves contain less than 8% of the AgEq metal content and their impact is further reduced by DSC planning to leave a proportion untreated at the end of LOM. Therefore, when applying the definition of reserves strictly, the totals should be a little bit less.
Mining
Mining is planned by open pit methods including drilling, blasting, loading, hauling, and dumping employing an owner/operator fleet. Mining is completed on 10 m benches at a block size of 20 m x 5 m in plan view. Equipment size is relatively large, with haul roads designed to accommodate 190-220 tonne class haul trucks. Phases 1 and 2 target the highest-grade areas of the deposit near surface.
Two locations were selected for waste rock storage: one south of the ultimate pit limits and a second one on the northwest side of the pit. Approximately 122 Mt of the waste rock will be routed to the construction of the tailings facility’s embankment located east of the pit.
Provision has been made for two locations for stockpiling low-grade and medium-grade material, one for oxide, and another for sulphide material. Low-grade material is defined as having NSR values between US$10/t and US$15/t and medium-grade above US$15/t. With 12 material streams, four of which are directly to the mill, four to stockpiles, and the rest for disposal and construction, the operation will have to carry out substantial grade control activities. The plan is to rely on blast hole sampling, which Crux Investor deems to be risky as such sampling is often unreliable.
Metallurgy and Processing
Metallurgical Test Work
Since the PEA there has been a tremendous amount of additional test work completed. Three test work campaigns were carried out by Blue Coast Research, which focused on confirming and improving the optimised flowsheet developed for the PEA. The test work included comminution tests, potential acid generation (“PAG”) of the material, mineralogy, dewatering, reagent addition, optimal grind size and regrind size, and flotation testing on many master and variability composites comprising 90% sulphide and 10% oxide material. As iterations of the PFS and FS flowsheet have been proven on upwards of 90 various samples and composites from multiple lithological zones within the deposit, the technical report concludes that the selected flowsheet is robust and wholly suitable for the processing of all sulphide ores, and blended sulphide/oxide ores with an oxide blend component of up to 15%.
Much attention was given to obtaining representative samples across the pit, reflecting the lithological and grade distributions of the Cordero deposit.
Test work indicates that there is good liberation at a relatively coarse grind size of 80% passing (“P80”) 200 μm. For this reason, the comminution tests were at a grind size of 212 μm, which is coarser than the usual 106 μm grind size. However, the measured values were still high, being for the 75th percentile hardness 21.0 kWh/t. Whereas the PEA assumed low abrasiveness based on 2011 test work, tests in 2021 showed much higher values with the 75th percentile being medium abrasive.
Preconcentration resulted in high upgrades and high mass rejection, but at the expense of metal recovery and is too low to justify such a step.
Mineralogical examination revealed that pyrite is by far the most common sulphide mineral and galena and sphalerite are the main economic minerals.
As it was found that certain lithological units contain carbonaceous material that affected proper flotation, the process requires a carbon pre-flotation step. With sequential flotation of first lead, followed by zinc, it was found that ZnSO4 had to be added as a zinc depressant, and during the lead concentrate cleaning stages, after regrinding to P80 30μm, again ZnSO4 addition plus NaCN to depress pyrite. Conditioning for zinc rougher flotation involved the addition of NaCN to depress pyrite, with preparation for cleaning flotation involving regrinding to P80 35μm.
Crux Investor concludes from the above discussion that processing is not straightforward and will be relatively costly.
The discussion on recovery models has several relationships between head grade and proportion of metal recovered in the various concentrates. Crux Investor has made checks for the most important economical metals of the relationship shown, and the recoveries used in the FS cash flow model. In general, the values correspond with a slight optimistic bias.
Table 3.6.1_1 shows the forecast metallurgical performance over the LOM. The precious metal content in the concentrates is determined by the recoveries to these concentrates and the metal content of Pb and Zn of these concentrates (which determine the total amount of concentrate).
For the low grade of the plant feed, the suggested recoveries are very high. Were it not for the substantial test work Crux Investor would have attached some risk to the numbers.
Not shown in the table are the moisture contents of the two concentrates, being 7-9% for Zn and 11% for Pb. Of special concern here is that the Pb-concentrate exceeds the Transportable Moisture Limit (“TML”) which means that no captain will allow transport of the material on his ship. In the discussion on processing in Section 3.6.2, it is apparent that a dryer is included in the design to bring the moisture content further down.
Processing
The selected flowsheet includes a single-stage crushing circuit, with the crushed product (P80 71 mm in the first three years, 85 mm later) reporting to the crushed ore stockpile. Ore is reclaimed to a grinding circuit consisting of a semi-autogenous (“SAG”) mill and a ball mill circuit operating in closed circuit, with a cyclone cluster to reduce the particle size to P80 200 μm.
Ground ore will report to a carbon pre-flotation circuit to remove carbonaceous material before feeding a two-stage rougher flotation circuit. Lead and silver minerals will report to the rougher concentrate of the first stage, while zinc minerals will report to the concentrate of the second stage via the tailings of the first stage. Lead-silver and zinc rougher concentrates will report to dedicated regrind circuits for further size reduction to P80 35 μm for lead concentrate, and P80 30 μm for zinc concentrate, to facilitate sulphide minerals liberation. The reground rougher concentrates will be treated in dedicated cleaner flotation circuits producing final lead-silver and zinc concentrates of requisite quality.
The final concentrates will then report to dedicated dewatering circuits that include high-rate thickeners and vertical plate-and-frame filter presses. For the lead-silver concentrate, the dewatering circuit also includes a dryer to ensure the target moisture of the cake for transportation. The resulting filter cakes will be handled by front-end loader(s) for stockpiling and loadout activities. The tailings from the process will be thickened in a high-rate thickener and pumped overland to the tailings management facility.
Economic Evaluation – Cordero Project
Economic Assumptions and Marketing Terms
The spot prices on 29 April 2024 of US$2,327/oz Au, US$31.34/oz Ag, US$1.02/lb Pb and US$1.38/lb Zn were used as the base case metal prices.
Table 3.7.1_1 reproduces the marketing terms assumed by Ausenco in the FS, which have been adopted, as these are generally in line with conventional terms. Penalty terms have been ignored as the metallurgical plant feed and metallurgical performance provided are not sufficient to calculate the content of deleterious metals in concentrates.
Crux Investor records that all marketing terms are improvements on what was assumed for the PEA.
Table 3.7.1_2 shows the relative contribution of each metal to at-mine revenue, and the implication for the silver equivalent grade.
With the much higher spot silver price compared to base metal prices, the base metal contribution to silver equivalent grade drops, making the Cordero project even more of a silver project. For all intents and purposes, the gold grade is immaterial despite the record spot gold price. This is the result of the very low feed grade and low metallurgical recovery, resulting in a metal content in the concentrate for which little is paid.
The Cordero project in its current format is an extremely low-grade silver project relying on silver contributing 49.8% (FS), or 55.3% (this valuation), to the at-mine revenue.
When referring back to the conversion factors suggested by Ausenco on page 11 under Section 3.3 for the MRE, it is evident that far too high weightings were given. Converting the revenue contribution of each metal to calculate AgEq grade gives 10.4 for Au, 17.1 for Pb, and 21.0 for Zn.
In addition, it is hard to reconcile the 57.7 g/t AgEq average grade of the FS in the table above with the picture presented in Figure 3.4_1, where only a very small proportion of blocks are orange, which indicates +50 g/t AgEq grade.
Production Schedule
The production schedule envisages mining of 347 Mt of oxide and sulphide material over 17 years, feeding the mill with higher grade material, and stockpiles with lower grade material, to feed the plant with as high grade as possible in the early years. After the cessation of mining, there will be two years of stockpile reclaim. As the plant’s performance can cope with maximal 15% oxide material, there will be 19.3 Mt oxide material left untreated at the end of LOM.
The total waste tonnage in the reserves mine plan is 696 Mt and this will be delivered to either the tailings storage facility or the rock storage facility. The overall waste-to-ore strip ratio during mining is 2.0:1, which increases to 2.2:1 when the 19.3Mt of low-grade oxides left in the stockpile facilities are considered as waste.
DSC has opted for a phased approach to developing the Cordero project. It seems that lately, this is becoming a popular approach in the mining industry. The probable reason is a reduction in initial capital expenditure improving the chances for a small company to raise funding. As with its review of Artemis Gold Corporation (“Artemis”) Crux Investor repeats its opinion that on paper a phased approach may work, but in practice it is fraught with risk and difficulties.
The staged expansion of the process plant over the LOM is as follows:
- Phase 1 (Year 1 to 3) – The process plant will be operated at an average nominal throughput of 25.5 kt/d (9.6 Mtpa), and is designed to account for variable ore hardness;
- Phase 2 (Year 4 to 6) – The plant will be expanded to process material at an average nominal throughput of 51.0 kt/d (maximally 19.2 Mtpa), and is designed to account for variable ore hardness; and
- Phase 3 (Year 7+) – The zinc cleaning and concentrate dewatering circuits will be expanded to process higher zinc grades in the feed material at the average nominal throughput of 51.0 kt/d (19.2 Mtpa).
Figure 3.7.2_1 shows as top illustration the total material mined per pit phase, and below the sources of plant feed over the LOM, illustrating the substantial rehandling included.
Total mine production is relatively constant from year to year, in particular when rehandling volumes are considered. Total reclamation over the LOM is 122 Mt, which substantially adds to the material handling requirement. Is all the capital lock-up and rehandling cost worth it? Figure 3.7.2_2 shows the difference between the mined grade and the milled grade (both expressed in g/t AgEq) over the LOM.
The milled grade substantially exceeds the mined grade until Year 8, almost 25% higher on average. Given the time value of money and the risk reduction from optimised early cash flow, Crux Investor concludes that the high grading is worthwhile in the case of the Cordero project.
Capital Expenditure Structure
Table 3.7.3_1 summarises the forecast capital expenditure for initial project development, the two expansions, and sustaining capital expenditure.
The relatively low outlay on the mine fleet is explained by it being financed with only a 25% down payment, and the remainder applied to operating costs with a provided interest rate of 10.25%. To Crux Investor it is incomprehensible that the regulatory authorities allow such assumptions, as it makes a joke of the requirement for economic analyses to be on a full equity basis. The Cordero FS mixes operational risk and financial risk. Whereas the technical report shows considerable haul truck additions to the mine fleet associated with expansions, there is no provision in the table for this.
The forecast expense of the construction of the process plant amounts to a cost of only US$320/t monthly capacity when including the contingency provision of US$45.3 million. This is far lower than conventional rates. A good rule of thumb is between US$650 and US$750/monthly tonne. As the process flow is not particularly simple, with flotation circuits for two products after rougher flotation and including a regrinding step, plus the need for substantial drying, the plant’s capital cost will not be that different from the conventional cost rate. This valuation has added another US$260 million to the initial plant expense. The expansions cost US$232 million per additional monthly capacity. This is very low, and would only be explainable if the initial construction provided for many items (e.g., earthworks, etc.) for these expansions, but that should be reflected in the initial capital expenditure, which itself is too low. Crux Investor has added US$400 million for the expansions.
Considering the very optimistic bias in the provisions for mining and processing activities, Crux Investor suspects that the same applies to infrastructure and other categories. However, without sufficient insight into the scope of work, there is no objective basis to amend the provisions.
Closure costs are estimated at US$137 million, but the technical report includes salvage credits of US$62 million for a net outlay of US$75 million. Although Crux Investor considers it imprudent to include such high salvage costs, it has accepted the net closure cost amount.
There is a small difference of US$0.26 million between the total capex in Table 3.7.3_1 and in the cash flow model, which is due to rounding.
Forecast Cash Operating Cost
As for the capital expenditure, suggested cost rates for operating activities look very optimistic.
Table 3.7.4_1 summarises the Ausenco rates and shows the amendments made for this study.
Crux Investor has referred to the actual cost at two other Mexican operations, Camino Rojo, an open pit operation with heap leaching, and the Los Filos Mine complex which has an open pit and underground component and heap leaching.
The Camino Rojo FS provided for a mining cost rate of US$1.77/t. After applying this and cost rates of US$3.20/t heap leached and US$1.6/t heap leached to actual 2023 production, the total calculated cost reconciled with the actual reported cost. The open pit mining cost rate at Los Filos was forecast at US$1.38/t in a FS dated 19 October 2022. However, the reported actual 2023 mining cost was US$2.08/t.
Crux Investor concludes that a mining cost rate of US$2.35/t, including US$0.35/t for financing, is reasonable.
Processing cost of US$6.28/t for treating material that is hard, medium abrasive, requiring treatment in several flotation circuits, and requiring additional drying, is very low. Crux Investor has amended this to US$10/t treated.
Similarly, a G&A expense of US$10 million per annum for an operation of the size of Cordero is not credible. At Camino Rojo, a simple heap leach operation mining a total of 11.6 Mtpa, of which 6.8 Mtpa is processed, has annual G&A expenses of US$11.2 million. Los Filos has an annual G&A of US$36.5 million. It is however a much more complex operation than Camino Rojo, involving mining 48.9 Mtpa (note: less than Cordero), some of which are from underground and treated by heap leaching.
Based on the above Crux Investor has provided US$20 million for G&A during Phase 1, reaching US$30 million for Phase 3.
Working Capital
Being an operation that will be producing base metal concentrates, which need to be treated and refined, the product pipeline will be considerable, and investments in working capital will be relatively high. Table 3.7.5_1 summarises the assumptions for the various items.
The total investment has been assumed recovered at the end of LOM, ignoring obsolesce and pilferage.
Royalties and Taxation
With only a very small portion of the area covering reserves subject to royalties to private parties, this valuation has ignored this as negligible.
The tax regulations in Mexico for mining companies include:
- An “environmental protection fee” of 0.5% on gross revenue for precious metals;
- A “Special Mining Tax” at 7.5% of the Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA). This charge is deductible for income tax purposes;
- Amortisation of pre-production investment to a 10% rate on a straight-line basis, allowing for accelerated depreciation when the LOM is shorter, resulting in full depreciation upon mine closure. The PEA uses a 10% rate for amortisation, but a 12.5% rate for depreciation of sustaining capital expenditure;
- The income taxes are currently 30%; and
- Tax on expatriation of dividends is 10%.
Results
Figure 3.7.7_1 shows the forecast financial performance over the LOM for two scenarios: the DSC FS, and this valuation.
The model for FS parameters has a different structure from the technical report by including for example off-mine charges in the calculation of at-mine revenue, and not accounting for it as an operating expense. The critical values to test whether or not the result is similar are taxes and net free cash flow. Crux Investor arrives at 6% higher taxes and 5% higher net free cash flow. From this it can be concluded the Crux Investor model is a reasonably accurate reflection of the FS model, but with an optimistic bias.
The table above indicates that for the FS assumptions the operation has a cash margin of almost 53%, which is usually indicative of a project that will give a decent return. Ausenco arrived at an NPV5 of US$1,177 million on an after-tax basis, which is 3% lower than the Crux Investor cash flow model. However, with Cordero being at project stage using an 8% discount rate is more appropriate.
The highlighted cells indicate the numbers that differ substantially from the FS, or were not accounted for by the Ausenco FS. The much higher spot metal prices more than compensate for the cost amendments by Crux Investor, with EBITDA substantially higher than the FS. However, the cash margin drops to just above 51.6%. What badly affects the net free cash flow is much higher assumed capital expenditure, inclusion of tax on repatriation of taxes, and corporate expenses in Canada. The Crux Investor valuation has 4% lower net free cash flow, which discounted at 8% has a value of US$518 million. As the NPV8 is only 60% of the required initial capital funding and the undiscounted payback period is 7.1 years, the Cordero project cannot be rated as attractive.
Table 3.7.7_2 shows the sensitivity of the net present values for various discount rates to the main input parameters.
The table illustrates the very marginal nature of the project with small changes in input values resulting in major changes in value. For a one percentage point change in the metal prices the NPV8 increases by 7.7% (i.e. US$39.9 million) and a one percentage point change in the cash operating cost (i.e. US$0.19/t treated) results in an 3.1% change in NPV8 (i.e. US$16.0 million), with a lower sensitivity for capital expenditure: 2.3% for every percentage point change.
Valuation of Discovery Silver Corporation – 29 May 2024
On 29 May 2024 the shares were trading at C$1.17 which converts to a market capitalisation of C$464 million given the 396.6 million issued shares.
No warrants were outstanding on 31 March 2024, but 19.3 million options were, of which 6.4 million were in the money, at an average exercise price of C$0.48. Restricted Share Units (“RSU”) of 5.7 million shares, and 2.4 million Deferred Share Units (”DFU”) were also outstanding.
At the end of March 2024, the net current assets amounted to C$42.9 million.
Based on the above information the Enterprise Value of DSC on a diluted basis is derived in Table 4_1.
The diluted Enterprise Value equals 62% of the NPV8 of this valuation. Whereas the DSC share price has lately risen on the back of the sharply improving silver price, the market is holding back on its re rating.
Executive Summary
Discovery Silver Corporation (“DSC”) (OTCQX:DSVMF) (TSX:DSV) is a Canadian company that is advancing the Cordero project, a very large but low-grade silver deposit in the Chihuahua State of Mexico.
It was the subject of a valuation report by Crux Investor published in September 2020, which was based on information provided in a preliminary economic assessment (“PEA”) report dated April 2018, commissioned by the previous owner of the project (i.e. Levon Resources Limited), and a review of drilling results of DSC during the first half of 2019, which varied from wide, low-grade intersections, to very short high-grade intersections.
The 2020 Crux Investor report raised a number of concerns relating to the validity of the mineral resource estimation (“MRE”), the lack of support in illustrations for bulk mineable resources, metallurgical test work, very low operating and capital cost provisions, and the failure of follow-up drilling to change the perception of erratic mineralisation. Crux Investor’s cash flow model arrived at a value that was a fraction of the diluted Enterprise Value.
DSC has kept developing the Cordero project through drilling, updating the MRE, extensive additional metallurgical test work, and carrying out several economic assessments culminating in a feasibility study dated 16 February 2023 that arrived at an NPV5 of US$1.2 billion. Meanwhile, the share price has substantially tanked since the Crux Investor report almost halving the diluted Enterprise Value. With lots of de-risking and a much higher silver price, DSC could have become a good opportunity, the reason for Crux Investor to investigate and publish this update report.
From the geological description it is clear that DSC has refined its genetic model for the mineralisation, with the depth of emplacement being deepest in the northeast and reflected by the type of deposits, such as skarns and mantos, and increasingly shallower emplacement towards the southwest, where replacements, stockwork veining, and discordant veins are predominant. A district scale fault has downthrown the southwest block and brought it in direct contact with the much deeper emplaced northeast block.
The latest MRE could rely on a much denser dill spacing (generally 50 m) over the southwestern and central portion of the deposit. The coefficient of variation is generally low and the generated semi-variograms seem robust, which should provide comfort about the MRE. The cut-off grade was expressed in a net smelter royalty (“NSR”) value and US$7.25/t derived, roughly equal to 9 g/t Ag. Whereas the MRE should give comfort, illustrations through the block model are difficult to reconcile with the provided average grade. The validity of the genetic model that attributes much importance to the NW-SE trending faults as conduits for metals is also not apparent from the illustrations.
One of the criticisms of Crux Investor in its 2020 report was the lack of test work in support of the suggested metallurgical performance. This has been addressed in this study, which gives an exhaustive discussion of all studies carried out since the PEA. The report concludes that the derived flowsheet is robust, but with crushing, grinding, carbon pre-flotation, two flotation steps involving regrinding of concentrate before cleaning, and the need for extra drying, the process is not straightforward and will be relatively costly.
The Cordero project is planned to be constructed in several phases, something that seems to be adopted by a lot of mining companies lately. On paper, this may be beneficial, but in practice, it is not, with operational and project management getting in each other’s way. The probable motivation is to lower initial capital expenditure and the funding requirements of a small company.
Crux Investor has reviewed the capital expenditure forecast concluding that the provisions for a plant with an initial 9.6 million tonnes per annum (“Mtpa”) capacity are woefully low, worse even for the expansion to 19.2 Mtpa. Crux Investor has added US$632 million in total for plant construction. Benchmarking the suggested mining cost rate of US$2.0/t, excluding equipment financing, with other Mexican operations, indicates that this is reasonable. However, processing and General and Administrative (“G&A”) expenses needed substantial upward revision. The total effect is that the operating cost changed from US$14.26 for the Feasibility Study (“FS”) to US$19.02/t for this valuation. With these amendments, and applying the much higher spot metal prices as of 29 May 2024, the Crux Investor valuation arrives at an NPV8 of US$518 million, which is still lower than the US$777 million for the FS, partially because Crux Investor also recognises the 10% tax on repatriation of profits, and corporate expenses in Canada. Given the marginal nature of Cordero, the results are highly sensitive to changes in revenue, operating, and capital costs.
On 29 May 2024, the diluted Enterprise Value of DSC was US$319 million, so it seems the market also does not attach much weight to the FS valuation. The diluted Enterprise Value equals 62% of the NPV8 of this valuation. Whereas the DSC share price has lately risen on the back of the sharply improving silver price, the market is holding back on its re-rating. To give the reader an indication to the very leveraged nature of DSC, when Crux Investor completed its first draft of this report at the end of April 2024 when the spot silver price was US$27.7/oz, the diluted Enterprise Value exceeded the NPV8 by 36%.
The high tide has lifted all silver-focused mineral companies and glosses over many flaws. If one remains positive about the prospects of further silver price rises DSC is a good option as it is highly leveraged to this price. It is however a high-risk opportunity.
With the current NPV8 value equal to 60% of the required initial funding, DSC will find it hard to source the necessary funding at attractive terms.
In light of the above the DSC is fully valued, but a punter can make some further gains from riding the silver price cycle.
Introduction
Conclusions Crux Investor Valuation Dated 2020
Discovery Silver Corporation (“DSC”) (OTCQX:DSVMF) (TSX:DSV) is a Canadian company that is advancing the Cordero project, a very large but low-grade silver deposit in the Chihuahua State of Mexico.
It was the subject of a valuation report by Crux Investor published in September 2020, which was based on information provided in a PEA report dated April 2018, commissioned by the previous owner of the project, and a review of drilling results of DSC during the first half of 2019, which varied from wide, low-grade intersections to very short high-grade intersections.
The 2020 Crux Investor report raised a number of concerns relating to:
- The use of flawed conversion factors for Au, Pb and Zn to express these in Ag equivalent (“AgEq”) grade, ignoring payment terms that in practice reduce their influence;
- The high coefficient of variation (“CV”, being standard deviation/mean), especially for base metals, raising a concern about the validity of the MRE;
- The resource estimation resorted to indicator kriging instead of ordinary kriging, pointing to complexities in estimation, never a good sign;
- A cut-off grade that at the spot price at publication date converted to an in-situ value of only US$12/t;
- Cross sections through the block model showed that the +50 g/t AgEq blocks were widely dispersed and not mineable as a single consistent deposit, therefore being highly unlikely to be economic;
- Crux Investor had major reservations relating to metallurgical test work, mostly relating to the use of unrepresentative samples and the lack of cleaner flotation test work. Suggested recoveries could only be considered highly speculative; and
- The valuation was based on an impractical mine schedule fluctuating wildly over the life of mine (“LOM”), and assuming very low capital expenditure and operating costs. After revising these provisions substantially upwards Crux Investor arrived at a NPV7.5 of only US$176 million, far below the diluted Enterprise Value of US$519 million. In light of this Crux Investor deemed the valuation of Discovery Metals to be over the top.
DSC management had probably recognised that the deposit was too low grade to ever be economic, judging from the fact they embarked on the 2019 drilling campaign to better define, in their words “a shallow, higher-grade component that could redefine the Project entirely and vastly improve its economics”. The focus of the higher-grade component was northeast trending veins. Crux Investor recorded that it was a peculiar strategy to drill a very limited number of veins to establish their “sweetening” impact on the overall resources for two reasons:
- The aggregate volume of veins, which have a width of at most 2 m, would be extremely limited. At the most optimistic aggregate strike length of 4 km, and a depth extent of 300 m with an average width of at best 1.5 m, the potential tonnage contribution is less than 5 Mt, or 0.8% of the tonnage of 615 Mt within the resource pit outline; and
- Bulk mining narrow, high-grade structures, which are often in contact with waste, will result in high dilution of the vein grade, greatly diminishing their impact.
A review of the drill results reported by Discovery Metals showed these constituted less than 17% of the drill hole length, and had a weighted average grade of 79 g/t AgEq. The highlighted higher-grade results with a weighted average grade of 231 g/t AgEq. covers only 2% of the drill hole length.
Furthermore, a review of cross sections with new drill results only added to the pessimism about whether the mineral resource grade could be sweetened. On the contrary, it was hard to understand how a mineral resource could have been defined in the first place with a prospective waste strip ratio below 1.0, and the suggested average grades. Holes in close proximity to each other had often distinctly different grades and large sections of internal waste.
The conclusion was that the 2019 drilling did not change Crux Investor’s negative conclusion of the PEA review.
Subsequent Developments
Since the valuation report, DSC has continued drilling, allowing it to declare an updated MRE in October 2021, with 87% of the contained metal in the Measured and Indicated (“M&I”) resource categories. Resources were declared for Oxide/Transition material assumed to be processed by heap leaching, and Sulphide material assumed to be processed by milling and flotation to concentrates. The MRE was followed quickly by DSC’s own PEA, with an NPV5 of a whopping C$1.16 billion and an internal rate of return (“IRR”) of more than 38%.
Drilling continued in 2022 to support a pre-feasibility study (“PFS”), which was completed with an effective date of 20 January 2023, and published on 10 February 2023, at the time indicating an NPV5 of C$1.5 billion. Duly encouraged the company embarked on delivering a Feasibility Study (“FS”) in the first half of 2024. This involved further drilling, metallurgical test work, studies relating to geotechnical and hydrogeological conditions, process design, electrical power provision, and tailings dam design. The FS report, effective 16 February 2024, and published 28 March 2024, arrived at an NPV5 of US$1.2 billion (= approx. C$1.6 billion), remarkably consistent with previous studies.
Figure 1_1 shows the share price performance of DSC on the Toronto Stock Exchange (“TSX”) since April 2019, when the company first became involved in the Cordero project.
The graph shows great enthusiasm for the Cordero project after its acquisition, partially explained by market expectations for a boom period for silver. After the Crux Investor report, there was a sharp decline, which is not necessarily related to the report’s conclusions. Positive drill results during 2021 caused a rising price, but since reaching C$2.52 in May 2021 there has been a downward trend, despite the very positive economic assessments in the PFS and FS. Recently the improving silver price has propelled the price upwards to its current C$1.17.
At the current market capitalisation of US$338 million, the company trades at a huge discount to the NPV of US$1.2 billion of the FS, a good reason for Crux Investor to delve deeper into the company.
Historical Financial Performance
Table 2_1 summarises the annual financial performance since 1 September 2019, the first year of involvement in the Cordero project.
The table shows that the company has incurred outlays of C$99 million on operational management and C$45 million on investments to advance Cordero. With C$189 million raised, fully covered by equity funding, the cash balance rose by C$46 million to a very healthy C$51 million by 31 March 2024. The cash balance has been kept relatively constant between C$46 million and C$67 million since 2020. Management obviously likes to hold a large funding buffer, far in excess of the annual burn rate.
Review of the Cordero Project
Background
The technical information and illustrations in this section were drawn from two NI.43-101 compliant technical reports, one by M3 Engineering & Technology Corporation (“M3”) in support of a PEA dated 18 April 2018 and another by Ausenco Engineering Canada ULC (“Ausenco”) reporting on the findings of a FS, dated 28 March 2024.
Unless specifically stated otherwise all information, illustrations, and wording have been extracted from these reports.
The Cordero project is located in the State of Chihuahua in north Central Mexico, approximately 200 km south of the city of Chihuahua, and approximately 35 km northeast of the mining town of Hidalgo del Parral (Figure 3.1_1).
The project is accessed via State Highway 24, with the last 10 km to site being on a gravel road.
The Cordero property consists of 26 mining concessions totalling 34,909 hectares (“ha”). Figure 3.1_2 shows the extent and outline of the tenement area, with the blue outline indicating where the resources have been defined.
The mineral rights have largely been secured by staking contiguous lode claims that cover approximately 37,000 ha. Only one small claim to the southeast of 22 (and coloured grey) is owned by another party, but is deemed of no consequence by DSC since it is far from the area underlain by the resources.
A small area along the southern edge of the reserve pit is covered by a royalty of 1%.
DSC claims to have access agreements in place to the surface areas that are important for being able to conduct mining operations.
Geology and Mineralisation
The Cordero project covers a belt that presently consists of seven known igneous intrusive centres aligned within a northeast trend 15 km on strike and 3-5 km wide (Figure 3.2_1).
The mineralisation at Cordero is related to these porphyry style intrusives, which shallow systematically toward the southwest end of the belt, from outcropping in the northeast, to being emplaced at kilometre depth in the southwest. In the PEA the presented SW-NE longitudinal section showed the individual intrusives as stocks that were progressively deeper emplaced going southwest. In the FS report this interpretation has changed to the bottom illustration in Figure 3.2_1.
The thick black line (with associated green colour for a dyke) in the longitudinal section above denotes the location of the Mega Fault, a major district-scale structure, which has a large downthrow of the western block. This has brought the intrusive phases emanating from the large quartz monzonite stock (in orange colour) down and into contact with the previously much deeper quartz monzonite.
Mineralisation within the Cordero resource is porphyry related within the northeast dominantly manto and skarn type mineralisation (= calcareous rock altered by mineralising fluids) and to the southwest of the Mega Fault, replacement type, stockwork veining and discordant, through going veins (1 m - 2 m widths) with up to 500 m strike lengths.
Figure 3.2_2 shows the conceptual model for mineralisation before being affected by structural deformation.
The source of the mineralisation are intrusives. Faults, fractures and lithological contacts provide the structural preparation and plumbing network through which metals can travel easily over long distances, as long as the fluid temperature and pressure remain high enough to keep them dissolved in solution. The NE-transcurrent faults (e.g., the Cordero Fault) acted as major conduits to focus hydrothermal fluid flow, and have influenced the location of mineralisation. Lithologic contacts, where crossed at high angles by fault and fracture systems, have influenced metal deposition as well as the chemical influence, through the development of more permeable alteration sequences. Breccias formed from a variety of mechanisms that create opportunities for fluid pressure to drop, and for metals to precipitate at those locations. In addition, changes in the width or direction of open fractures, faults, and bends along lithologic contacts, and changes in lithologic competency (how easily the rock fractures) create favourable environments for the development of extensional dilation zones that enhance fluid flow as permeability increases along the strike of a fault- bend (“dilational jog”), but may also create the possibility for these favourable environments to become less favourable as fluid conduits that tighten up under compression.
From the above description it is evident that the controls for mineralisation at Cordero are multi-faceted and complex.
The minerals of economic interest are dominantly silver bearing galena (PbS), sphalerite, and pyrite (FeS2) present in roughly equal proportions. Other minerals associated with silver are stibnite (Sb2S3), tetrahedrite ({Cu,Fe,Zn,Ag}12,Sb4S13) and arsenopyrite (FeAsS). These antimony and arsenic containing minerals could spell metallurgical trouble for an operation.
Drill hole information shows that oxidation of sulphides is generally present within 2-60 m of the present surface. Some narrow fracture zones are oxidised to depths of +600 m. Oxidation could add to metallurgical complexity. At the transition from oxidised to fresh rock there can be supergene enrichment over a vertical distance of 40 m.
Mineral Resources
The Cordero MRE is based on 793 drill holes contributing 310,861 m of sampled intersections. Figure 3.3_1 shows a map with the localities of the holes of the various drill phases for the Cordero resources area. In the densely drilled sections of the project, the spacing between neighbouring drill holes typically averages just below 50 m. However, northeast of the Mega Fault an area with a footprint that is approximately one-third of the pit outline, drilling is very sparse.
For the geological model, only those faults demonstrating significant displacements were chosen as the primary bounding surfaces of fault blocks. Consequently, this process led to the delineation of twelve distinct fault blocks, each terminated by major geological structures. A lithology model was generated and incorporated into these fault blocks.
For the grade estimation, adjacent fault blocks were merged if they contained similar mineralisation, and were maintained as separate fault blocks if there was a clear break in grade at the boundary. This resulted in two estimation domains for oxide and three for sulphide. Each of these domains further comprises two sub-domains: a high-grade sub-domain and a medium to low-grade stockwork domain. The establishment of these sub-domains involved modelling of grade zones, utilising trends specific to each of the six primary domains. These trends were determined based on a 30 g/t AgEq cut-off grade and structural considerations derived from fault and vein orientations.
Figure 3.3_2 shows the six domains for sulphide mineralisation.
Using 2 m sample composites and after grade capping the coefficient of variability (= standard deviation/mean) was generally well below 2, which is excellent for ordinary kriging. Variography showed significant anisotropy with a prominent NE-SW trend. The obtained semi-variograms are robust as shown in Figure 3.3_3, which contains an example of silver grade variance along the major axis.
For all metals, spherical two-structure models were employed to fit the experimental semi-variograms.
A block model was created using blocks measuring 20 m in the X direction (NE-SW), 5 m in the Y direction (NW-SE), and 10 m in the Z direction (vertical).
The input parameters used for the constraining pit shells of the Cordero mineralisation to meet the “reasonable prospects for eventual economic extraction” requirement, used a cut-off grade of US$7.25/t net smelter return for sulphide resources. The metal prices assumed were US$24/oz Ag, US$1,800/oz Au, US$1.10/lb Pb, and US$1.20/lb Zn. Metallurgical recoveries and off-mine charges were taken into account, with a mining cost rate of US$1.59/t mined, processing cost of US$5.22/t treated, and G&A cost of US$0.86/t treated.
Using the above parameters Ausenco comes to the following factors to convert grades into AgEq grades:
- 15.52 for Au grade (in g/t);
- 31.15 for Pb grade (in %); and
- 34.68 for Zn grade (in %).
Converting the cut-off grade from a monetary value to Ag Eq cut-off grade by simplistically dividing the NSR cut-off grade (i.e. US$7.25) by the value of 1 g/t Ag (i.e. US$24/31.1) would make it 9.4 g/t.
Table 3.3_1 is the resource statement for the Cordero project, effective August 2023.
The table shows that oxide resources comprise a very small portion of total resources accounting for 8% of the AgEq ounces. Inferred resources are also a minor component of total resources, which implies that not much can be expected for dropping the strip ratio by converting these to M&I resources.
When referring to Figure 3.3_4, it is surprising that Measured Resources are larger than Indicated Resources, given its relatively small surface expression and that Inferred Resources comprise such a small proportion of overall resources.
The technical report includes a large number of validation measures that all show impressive results. Figure 3.3_5 for example shows the close correlation between composite values and block estimates. How the graph functions is however not clear, as any block value is informed by many composite values.
However, comparing various sections raises some questions.
Figure 3.3_6 shows the traces of cross sections for which there are illustrations included in the technical report. Crux Investor has made annotations to enlarge the numbering to make it more readable and has included traces from other maps in the report.
The longitudinal section through the block model in Figure 3.3_7 is provided in the technical report as an illustration of the bulk nature of the deposit. Considering that all colours warmer than green are above the cut-off grade, it is a convincing picture. However, the section was carefully chosen through the most mineralised portion of the deposit. Moreover, it seems that the section is not vertical, but rather inclined to the northwest, which is one of the dominant directions of the mineralisation.
Unfortunately, the longitudinal section does not include boreholes and their grade intercepts to allow for comparison between estimated block grade and composite grades. This is only available for cross sections along coordinates with the pre-fix “CPL” in Figure 3.3_6 for which there are also separately available cross sections through the block model, but with very four grade intervals, the highest for block grades exceeding 20 g/t AgEq.
Figure 3.3_8 to Figure 3.3_10 compare information in cross sections along the coordinate traces in Figure 3.3_6. The cross section at the top gives borehole intersections and geology, the middle illustration is a cross section through the block model with four grade intervals, and the bottom cross section again through the final block model, but with five grade intervals. The bottom cross sections have been inclined to the northeast, again aligning it more with the mineralisation and overstating the true nature of it.
The first noticeable aspect is the low grades associated with the Cordero Fault, which is in contradiction to the genetic model for mineralisation. Also noticeable are large sections with very spotty and low grades, which are not well reflected in the block model sections. Finally, both sets of sections through the block model are generally similar, but with the bottom ones giving a higher average grade impression. As the cross sections have been chosen through the best mineralised portion of the deposit, it is hard to understand how the reserves using a 10 g/t AgEq cut-off grade could have been defined with a strip ratio of only 2.0 : 1
Mineral Reserves
The reserve estimation is based on mining of the Cordero deposit by conventional open pit mining utilising a traditional drill, blast, load, and haul sequence to deliver mill feed to the primary crusher, and to waste dumps located to the north and south of the proposed pits. The pit design is based on a 10 m bench height to match the resource model bench height.
The estimation of Mineral Reserves uses a cut-off grade of US$10/t (i.e. approx. US$3/t higher than for the conceptual mineral resource pit) and includes only high-grade oxides up to a maximum of 15% of the mill feed to keep metallurgical performance stable. The metal prices assumed are US$20/oz Ag, US$1,600/oz Au, US$0.95/lb Pb and US$1.20/lb Zn, which generally compare very low to currently prevailing prices. However, the operating cost provisions also are low for the type of operation. The overall slope angles vary from 42 degrees to 52 degrees, which cannot be considered conservative.
The estimation of dilution assumes a skin for ore/waste contact dilution of 1.3 m on average for a 10 m bench height. The overall effect is an additional 2.4% plant feed at a grade that is approx. 2.7% lower.
Figure 3.4_1 is a longitudinal section approximately 300 m NW of section B-B’ in Figure 3.3_4 through the centre and highest grade portion of the reserve pit. The colours warmer than yellow are for grades above 30 g/t AgEq.
No pit optimisation results graph is presented in the technical report. The mineral reserves statement is given in Table 3.4_1 together with the conversion ratios from M&I mineral resources for tonnage, grades and metal content.
Of the precious metal in total resources, more than 61% is captured in the reserves at a grade that is approximately 35% higher. Whereas an increase in cut-off grade would account for some average grade increase, the larger increase in average grade than cut-off grade must partially be due to a different shape of the pit from the conceptual mineral resources pit.
The oxide reserves contain less than 8% of the AgEq metal content and their impact is further reduced by DSC planning to leave a proportion untreated at the end of LOM. Therefore, when applying the definition of reserves strictly, the totals should be a little bit less.
Mining
Mining is planned by open pit methods including drilling, blasting, loading, hauling, and dumping employing an owner/operator fleet. Mining is completed on 10 m benches at a block size of 20 m x 5 m in plan view. Equipment size is relatively large, with haul roads designed to accommodate 190-220 tonne class haul trucks. Phases 1 and 2 target the highest-grade areas of the deposit near surface.
Two locations were selected for waste rock storage: one south of the ultimate pit limits and a second one on the northwest side of the pit. Approximately 122 Mt of the waste rock will be routed to the construction of the tailings facility’s embankment located east of the pit.
Provision has been made for two locations for stockpiling low-grade and medium-grade material, one for oxide, and another for sulphide material. Low-grade material is defined as having NSR values between US$10/t and US$15/t and medium-grade above US$15/t. With 12 material streams, four of which are directly to the mill, four to stockpiles, and the rest for disposal and construction, the operation will have to carry out substantial grade control activities. The plan is to rely on blast hole sampling, which Crux Investor deems to be risky as such sampling is often unreliable.
Metallurgy and Processing
Metallurgical Test Work
Since the PEA there has been a tremendous amount of additional test work completed. Three test work campaigns were carried out by Blue Coast Research, which focused on confirming and improving the optimised flowsheet developed for the PEA. The test work included comminution tests, potential acid generation (“PAG”) of the material, mineralogy, dewatering, reagent addition, optimal grind size and regrind size, and flotation testing on many master and variability composites comprising 90% sulphide and 10% oxide material. As iterations of the PFS and FS flowsheet have been proven on upwards of 90 various samples and composites from multiple lithological zones within the deposit, the technical report concludes that the selected flowsheet is robust and wholly suitable for the processing of all sulphide ores, and blended sulphide/oxide ores with an oxide blend component of up to 15%.
Much attention was given to obtaining representative samples across the pit, reflecting the lithological and grade distributions of the Cordero deposit.
Test work indicates that there is good liberation at a relatively coarse grind size of 80% passing (“P80”) 200 μm. For this reason, the comminution tests were at a grind size of 212 μm, which is coarser than the usual 106 μm grind size. However, the measured values were still high, being for the 75th percentile hardness 21.0 kWh/t. Whereas the PEA assumed low abrasiveness based on 2011 test work, tests in 2021 showed much higher values with the 75th percentile being medium abrasive.
Preconcentration resulted in high upgrades and high mass rejection, but at the expense of metal recovery and is too low to justify such a step.
Mineralogical examination revealed that pyrite is by far the most common sulphide mineral and galena and sphalerite are the main economic minerals.
As it was found that certain lithological units contain carbonaceous material that affected proper flotation, the process requires a carbon pre-flotation step. With sequential flotation of first lead, followed by zinc, it was found that ZnSO4 had to be added as a zinc depressant, and during the lead concentrate cleaning stages, after regrinding to P80 30μm, again ZnSO4 addition plus NaCN to depress pyrite. Conditioning for zinc rougher flotation involved the addition of NaCN to depress pyrite, with preparation for cleaning flotation involving regrinding to P80 35μm.
Crux Investor concludes from the above discussion that processing is not straightforward and will be relatively costly.
The discussion on recovery models has several relationships between head grade and proportion of metal recovered in the various concentrates. Crux Investor has made checks for the most important economical metals of the relationship shown, and the recoveries used in the FS cash flow model. In general, the values correspond with a slight optimistic bias.
Table 3.6.1_1 shows the forecast metallurgical performance over the LOM. The precious metal content in the concentrates is determined by the recoveries to these concentrates and the metal content of Pb and Zn of these concentrates (which determine the total amount of concentrate).
For the low grade of the plant feed, the suggested recoveries are very high. Were it not for the substantial test work Crux Investor would have attached some risk to the numbers.
Not shown in the table are the moisture contents of the two concentrates, being 7-9% for Zn and 11% for Pb. Of special concern here is that the Pb-concentrate exceeds the Transportable Moisture Limit (“TML”) which means that no captain will allow transport of the material on his ship. In the discussion on processing in Section 3.6.2, it is apparent that a dryer is included in the design to bring the moisture content further down.
Processing
The selected flowsheet includes a single-stage crushing circuit, with the crushed product (P80 71 mm in the first three years, 85 mm later) reporting to the crushed ore stockpile. Ore is reclaimed to a grinding circuit consisting of a semi-autogenous (“SAG”) mill and a ball mill circuit operating in closed circuit, with a cyclone cluster to reduce the particle size to P80 200 μm.
Ground ore will report to a carbon pre-flotation circuit to remove carbonaceous material before feeding a two-stage rougher flotation circuit. Lead and silver minerals will report to the rougher concentrate of the first stage, while zinc minerals will report to the concentrate of the second stage via the tailings of the first stage. Lead-silver and zinc rougher concentrates will report to dedicated regrind circuits for further size reduction to P80 35 μm for lead concentrate, and P80 30 μm for zinc concentrate, to facilitate sulphide minerals liberation. The reground rougher concentrates will be treated in dedicated cleaner flotation circuits producing final lead-silver and zinc concentrates of requisite quality.
The final concentrates will then report to dedicated dewatering circuits that include high-rate thickeners and vertical plate-and-frame filter presses. For the lead-silver concentrate, the dewatering circuit also includes a dryer to ensure the target moisture of the cake for transportation. The resulting filter cakes will be handled by front-end loader(s) for stockpiling and loadout activities. The tailings from the process will be thickened in a high-rate thickener and pumped overland to the tailings management facility.
Economic Evaluation – Cordero Project
Economic Assumptions and Marketing Terms
The spot prices on 29 April 2024 of US$2,327/oz Au, US$31.34/oz Ag, US$1.02/lb Pb and US$1.38/lb Zn were used as the base case metal prices.
Table 3.7.1_1 reproduces the marketing terms assumed by Ausenco in the FS, which have been adopted, as these are generally in line with conventional terms. Penalty terms have been ignored as the metallurgical plant feed and metallurgical performance provided are not sufficient to calculate the content of deleterious metals in concentrates.
Crux Investor records that all marketing terms are improvements on what was assumed for the PEA.
Table 3.7.1_2 shows the relative contribution of each metal to at-mine revenue, and the implication for the silver equivalent grade.
With the much higher spot silver price compared to base metal prices, the base metal contribution to silver equivalent grade drops, making the Cordero project even more of a silver project. For all intents and purposes, the gold grade is immaterial despite the record spot gold price. This is the result of the very low feed grade and low metallurgical recovery, resulting in a metal content in the concentrate for which little is paid.
The Cordero project in its current format is an extremely low-grade silver project relying on silver contributing 49.8% (FS), or 55.3% (this valuation), to the at-mine revenue.
When referring back to the conversion factors suggested by Ausenco on page 11 under Section 3.3 for the MRE, it is evident that far too high weightings were given. Converting the revenue contribution of each metal to calculate AgEq grade gives 10.4 for Au, 17.1 for Pb, and 21.0 for Zn.
In addition, it is hard to reconcile the 57.7 g/t AgEq average grade of the FS in the table above with the picture presented in Figure 3.4_1, where only a very small proportion of blocks are orange, which indicates +50 g/t AgEq grade.
Production Schedule
The production schedule envisages mining of 347 Mt of oxide and sulphide material over 17 years, feeding the mill with higher grade material, and stockpiles with lower grade material, to feed the plant with as high grade as possible in the early years. After the cessation of mining, there will be two years of stockpile reclaim. As the plant’s performance can cope with maximal 15% oxide material, there will be 19.3 Mt oxide material left untreated at the end of LOM.
The total waste tonnage in the reserves mine plan is 696 Mt and this will be delivered to either the tailings storage facility or the rock storage facility. The overall waste-to-ore strip ratio during mining is 2.0:1, which increases to 2.2:1 when the 19.3Mt of low-grade oxides left in the stockpile facilities are considered as waste.
DSC has opted for a phased approach to developing the Cordero project. It seems that lately, this is becoming a popular approach in the mining industry. The probable reason is a reduction in initial capital expenditure improving the chances for a small company to raise funding. As with its review of Artemis Gold Corporation (“Artemis”) Crux Investor repeats its opinion that on paper a phased approach may work, but in practice it is fraught with risk and difficulties.
The staged expansion of the process plant over the LOM is as follows:
- Phase 1 (Year 1 to 3) – The process plant will be operated at an average nominal throughput of 25.5 kt/d (9.6 Mtpa), and is designed to account for variable ore hardness;
- Phase 2 (Year 4 to 6) – The plant will be expanded to process material at an average nominal throughput of 51.0 kt/d (maximally 19.2 Mtpa), and is designed to account for variable ore hardness; and
- Phase 3 (Year 7+) – The zinc cleaning and concentrate dewatering circuits will be expanded to process higher zinc grades in the feed material at the average nominal throughput of 51.0 kt/d (19.2 Mtpa).
Figure 3.7.2_1 shows as top illustration the total material mined per pit phase, and below the sources of plant feed over the LOM, illustrating the substantial rehandling included.
Total mine production is relatively constant from year to year, in particular when rehandling volumes are considered. Total reclamation over the LOM is 122 Mt, which substantially adds to the material handling requirement. Is all the capital lock-up and rehandling cost worth it? Figure 3.7.2_2 shows the difference between the mined grade and the milled grade (both expressed in g/t AgEq) over the LOM.
The milled grade substantially exceeds the mined grade until Year 8, almost 25% higher on average. Given the time value of money and the risk reduction from optimised early cash flow, Crux Investor concludes that the high grading is worthwhile in the case of the Cordero project.
Capital Expenditure Structure
Table 3.7.3_1 summarises the forecast capital expenditure for initial project development, the two expansions, and sustaining capital expenditure.
The relatively low outlay on the mine fleet is explained by it being financed with only a 25% down payment, and the remainder applied to operating costs with a provided interest rate of 10.25%. To Crux Investor it is incomprehensible that the regulatory authorities allow such assumptions, as it makes a joke of the requirement for economic analyses to be on a full equity basis. The Cordero FS mixes operational risk and financial risk. Whereas the technical report shows considerable haul truck additions to the mine fleet associated with expansions, there is no provision in the table for this.
The forecast expense of the construction of the process plant amounts to a cost of only US$320/t monthly capacity when including the contingency provision of US$45.3 million. This is far lower than conventional rates. A good rule of thumb is between US$650 and US$750/monthly tonne. As the process flow is not particularly simple, with flotation circuits for two products after rougher flotation and including a regrinding step, plus the need for substantial drying, the plant’s capital cost will not be that different from the conventional cost rate. This valuation has added another US$260 million to the initial plant expense. The expansions cost US$232 million per additional monthly capacity. This is very low, and would only be explainable if the initial construction provided for many items (e.g., earthworks, etc.) for these expansions, but that should be reflected in the initial capital expenditure, which itself is too low. Crux Investor has added US$400 million for the expansions.
Considering the very optimistic bias in the provisions for mining and processing activities, Crux Investor suspects that the same applies to infrastructure and other categories. However, without sufficient insight into the scope of work, there is no objective basis to amend the provisions.
Closure costs are estimated at US$137 million, but the technical report includes salvage credits of US$62 million for a net outlay of US$75 million. Although Crux Investor considers it imprudent to include such high salvage costs, it has accepted the net closure cost amount.
There is a small difference of US$0.26 million between the total capex in Table 3.7.3_1 and in the cash flow model, which is due to rounding.
Forecast Cash Operating Cost
As for the capital expenditure, suggested cost rates for operating activities look very optimistic.
Table 3.7.4_1 summarises the Ausenco rates and shows the amendments made for this study.
Crux Investor has referred to the actual cost at two other Mexican operations, Camino Rojo, an open pit operation with heap leaching, and the Los Filos Mine complex which has an open pit and underground component and heap leaching.
The Camino Rojo FS provided for a mining cost rate of US$1.77/t. After applying this and cost rates of US$3.20/t heap leached and US$1.6/t heap leached to actual 2023 production, the total calculated cost reconciled with the actual reported cost. The open pit mining cost rate at Los Filos was forecast at US$1.38/t in a FS dated 19 October 2022. However, the reported actual 2023 mining cost was US$2.08/t.
Crux Investor concludes that a mining cost rate of US$2.35/t, including US$0.35/t for financing, is reasonable.
Processing cost of US$6.28/t for treating material that is hard, medium abrasive, requiring treatment in several flotation circuits, and requiring additional drying, is very low. Crux Investor has amended this to US$10/t treated.
Similarly, a G&A expense of US$10 million per annum for an operation of the size of Cordero is not credible. At Camino Rojo, a simple heap leach operation mining a total of 11.6 Mtpa, of which 6.8 Mtpa is processed, has annual G&A expenses of US$11.2 million. Los Filos has an annual G&A of US$36.5 million. It is however a much more complex operation than Camino Rojo, involving mining 48.9 Mtpa (note: less than Cordero), some of which are from underground and treated by heap leaching.
Based on the above Crux Investor has provided US$20 million for G&A during Phase 1, reaching US$30 million for Phase 3.
Working Capital
Being an operation that will be producing base metal concentrates, which need to be treated and refined, the product pipeline will be considerable, and investments in working capital will be relatively high. Table 3.7.5_1 summarises the assumptions for the various items.
The total investment has been assumed recovered at the end of LOM, ignoring obsolesce and pilferage.
Royalties and Taxation
With only a very small portion of the area covering reserves subject to royalties to private parties, this valuation has ignored this as negligible.
The tax regulations in Mexico for mining companies include:
- An “environmental protection fee” of 0.5% on gross revenue for precious metals;
- A “Special Mining Tax” at 7.5% of the Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA). This charge is deductible for income tax purposes;
- Amortisation of pre-production investment to a 10% rate on a straight-line basis, allowing for accelerated depreciation when the LOM is shorter, resulting in full depreciation upon mine closure. The PEA uses a 10% rate for amortisation, but a 12.5% rate for depreciation of sustaining capital expenditure;
- The income taxes are currently 30%; and
- Tax on expatriation of dividends is 10%.
Results
Figure 3.7.7_1 shows the forecast financial performance over the LOM for two scenarios: the DSC FS, and this valuation.
The model for FS parameters has a different structure from the technical report by including for example off-mine charges in the calculation of at-mine revenue, and not accounting for it as an operating expense. The critical values to test whether or not the result is similar are taxes and net free cash flow. Crux Investor arrives at 6% higher taxes and 5% higher net free cash flow. From this it can be concluded the Crux Investor model is a reasonably accurate reflection of the FS model, but with an optimistic bias.
The table above indicates that for the FS assumptions the operation has a cash margin of almost 53%, which is usually indicative of a project that will give a decent return. Ausenco arrived at an NPV5 of US$1,177 million on an after-tax basis, which is 3% lower than the Crux Investor cash flow model. However, with Cordero being at project stage using an 8% discount rate is more appropriate.
The highlighted cells indicate the numbers that differ substantially from the FS, or were not accounted for by the Ausenco FS. The much higher spot metal prices more than compensate for the cost amendments by Crux Investor, with EBITDA substantially higher than the FS. However, the cash margin drops to just above 51.6%. What badly affects the net free cash flow is much higher assumed capital expenditure, inclusion of tax on repatriation of taxes, and corporate expenses in Canada. The Crux Investor valuation has 4% lower net free cash flow, which discounted at 8% has a value of US$518 million. As the NPV8 is only 60% of the required initial capital funding and the undiscounted payback period is 7.1 years, the Cordero project cannot be rated as attractive.
Table 3.7.7_2 shows the sensitivity of the net present values for various discount rates to the main input parameters.
The table illustrates the very marginal nature of the project with small changes in input values resulting in major changes in value. For a one percentage point change in the metal prices the NPV8 increases by 7.7% (i.e. US$39.9 million) and a one percentage point change in the cash operating cost (i.e. US$0.19/t treated) results in an 3.1% change in NPV8 (i.e. US$16.0 million), with a lower sensitivity for capital expenditure: 2.3% for every percentage point change.
Valuation of Discovery Silver Corporation – 29 May 2024
On 29 May 2024 the shares were trading at C$1.17 which converts to a market capitalisation of C$464 million given the 396.6 million issued shares.
No warrants were outstanding on 31 March 2024, but 19.3 million options were, of which 6.4 million were in the money, at an average exercise price of C$0.48. Restricted Share Units (“RSU”) of 5.7 million shares, and 2.4 million Deferred Share Units (”DFU”) were also outstanding.
At the end of March 2024, the net current assets amounted to C$42.9 million.
Based on the above information the Enterprise Value of DSC on a diluted basis is derived in Table 4_1.
The diluted Enterprise Value equals 62% of the NPV8 of this valuation. Whereas the DSC share price has lately risen on the back of the sharply improving silver price, the market is holding back on its re rating.
Executive Summary
Discovery Silver Corporation (“DSC”) (OTCQX:DSVMF) (TSX:DSV) is a Canadian company that is advancing the Cordero project, a very large but low-grade silver deposit in the Chihuahua State of Mexico.
It was the subject of a valuation report by Crux Investor published in September 2020, which was based on information provided in a preliminary economic assessment (“PEA”) report dated April 2018, commissioned by the previous owner of the project (i.e. Levon Resources Limited), and a review of drilling results of DSC during the first half of 2019, which varied from wide, low-grade intersections, to very short high-grade intersections.
The 2020 Crux Investor report raised a number of concerns relating to the validity of the mineral resource estimation (“MRE”), the lack of support in illustrations for bulk mineable resources, metallurgical test work, very low operating and capital cost provisions, and the failure of follow-up drilling to change the perception of erratic mineralisation. Crux Investor’s cash flow model arrived at a value that was a fraction of the diluted Enterprise Value.
DSC has kept developing the Cordero project through drilling, updating the MRE, extensive additional metallurgical test work, and carrying out several economic assessments culminating in a feasibility study dated 16 February 2023 that arrived at an NPV5 of US$1.2 billion. Meanwhile, the share price has substantially tanked since the Crux Investor report almost halving the diluted Enterprise Value. With lots of de-risking and a much higher silver price, DSC could have become a good opportunity, the reason for Crux Investor to investigate and publish this update report.
From the geological description it is clear that DSC has refined its genetic model for the mineralisation, with the depth of emplacement being deepest in the northeast and reflected by the type of deposits, such as skarns and mantos, and increasingly shallower emplacement towards the southwest, where replacements, stockwork veining, and discordant veins are predominant. A district scale fault has downthrown the southwest block and brought it in direct contact with the much deeper emplaced northeast block.
The latest MRE could rely on a much denser dill spacing (generally 50 m) over the southwestern and central portion of the deposit. The coefficient of variation is generally low and the generated semi-variograms seem robust, which should provide comfort about the MRE. The cut-off grade was expressed in a net smelter royalty (“NSR”) value and US$7.25/t derived, roughly equal to 9 g/t Ag. Whereas the MRE should give comfort, illustrations through the block model are difficult to reconcile with the provided average grade. The validity of the genetic model that attributes much importance to the NW-SE trending faults as conduits for metals is also not apparent from the illustrations.
One of the criticisms of Crux Investor in its 2020 report was the lack of test work in support of the suggested metallurgical performance. This has been addressed in this study, which gives an exhaustive discussion of all studies carried out since the PEA. The report concludes that the derived flowsheet is robust, but with crushing, grinding, carbon pre-flotation, two flotation steps involving regrinding of concentrate before cleaning, and the need for extra drying, the process is not straightforward and will be relatively costly.
The Cordero project is planned to be constructed in several phases, something that seems to be adopted by a lot of mining companies lately. On paper, this may be beneficial, but in practice, it is not, with operational and project management getting in each other’s way. The probable motivation is to lower initial capital expenditure and the funding requirements of a small company.
Crux Investor has reviewed the capital expenditure forecast concluding that the provisions for a plant with an initial 9.6 million tonnes per annum (“Mtpa”) capacity are woefully low, worse even for the expansion to 19.2 Mtpa. Crux Investor has added US$632 million in total for plant construction. Benchmarking the suggested mining cost rate of US$2.0/t, excluding equipment financing, with other Mexican operations, indicates that this is reasonable. However, processing and General and Administrative (“G&A”) expenses needed substantial upward revision. The total effect is that the operating cost changed from US$14.26 for the Feasibility Study (“FS”) to US$19.02/t for this valuation. With these amendments, and applying the much higher spot metal prices as of 29 May 2024, the Crux Investor valuation arrives at an NPV8 of US$518 million, which is still lower than the US$777 million for the FS, partially because Crux Investor also recognises the 10% tax on repatriation of profits, and corporate expenses in Canada. Given the marginal nature of Cordero, the results are highly sensitive to changes in revenue, operating, and capital costs.
On 29 May 2024, the diluted Enterprise Value of DSC was US$319 million, so it seems the market also does not attach much weight to the FS valuation. The diluted Enterprise Value equals 62% of the NPV8 of this valuation. Whereas the DSC share price has lately risen on the back of the sharply improving silver price, the market is holding back on its re-rating. To give the reader an indication to the very leveraged nature of DSC, when Crux Investor completed its first draft of this report at the end of April 2024 when the spot silver price was US$27.7/oz, the diluted Enterprise Value exceeded the NPV8 by 36%.
The high tide has lifted all silver-focused mineral companies and glosses over many flaws. If one remains positive about the prospects of further silver price rises DSC is a good option as it is highly leveraged to this price. It is however a high-risk opportunity.
With the current NPV8 value equal to 60% of the required initial funding, DSC will find it hard to source the necessary funding at attractive terms.
In light of the above the DSC is fully valued, but a punter can make some further gains from riding the silver price cycle.
Introduction
Conclusions Crux Investor Valuation Dated 2020
Discovery Silver Corporation (“DSC”) (OTCQX:DSVMF) (TSX:DSV) is a Canadian company that is advancing the Cordero project, a very large but low-grade silver deposit in the Chihuahua State of Mexico.
It was the subject of a valuation report by Crux Investor published in September 2020, which was based on information provided in a PEA report dated April 2018, commissioned by the previous owner of the project, and a review of drilling results of DSC during the first half of 2019, which varied from wide, low-grade intersections to very short high-grade intersections.
The 2020 Crux Investor report raised a number of concerns relating to:
- The use of flawed conversion factors for Au, Pb and Zn to express these in Ag equivalent (“AgEq”) grade, ignoring payment terms that in practice reduce their influence;
- The high coefficient of variation (“CV”, being standard deviation/mean), especially for base metals, raising a concern about the validity of the MRE;
- The resource estimation resorted to indicator kriging instead of ordinary kriging, pointing to complexities in estimation, never a good sign;
- A cut-off grade that at the spot price at publication date converted to an in-situ value of only US$12/t;
- Cross sections through the block model showed that the +50 g/t AgEq blocks were widely dispersed and not mineable as a single consistent deposit, therefore being highly unlikely to be economic;
- Crux Investor had major reservations relating to metallurgical test work, mostly relating to the use of unrepresentative samples and the lack of cleaner flotation test work. Suggested recoveries could only be considered highly speculative; and
- The valuation was based on an impractical mine schedule fluctuating wildly over the life of mine (“LOM”), and assuming very low capital expenditure and operating costs. After revising these provisions substantially upwards Crux Investor arrived at a NPV7.5 of only US$176 million, far below the diluted Enterprise Value of US$519 million. In light of this Crux Investor deemed the valuation of Discovery Metals to be over the top.
DSC management had probably recognised that the deposit was too low grade to ever be economic, judging from the fact they embarked on the 2019 drilling campaign to better define, in their words “a shallow, higher-grade component that could redefine the Project entirely and vastly improve its economics”. The focus of the higher-grade component was northeast trending veins. Crux Investor recorded that it was a peculiar strategy to drill a very limited number of veins to establish their “sweetening” impact on the overall resources for two reasons:
- The aggregate volume of veins, which have a width of at most 2 m, would be extremely limited. At the most optimistic aggregate strike length of 4 km, and a depth extent of 300 m with an average width of at best 1.5 m, the potential tonnage contribution is less than 5 Mt, or 0.8% of the tonnage of 615 Mt within the resource pit outline; and
- Bulk mining narrow, high-grade structures, which are often in contact with waste, will result in high dilution of the vein grade, greatly diminishing their impact.
A review of the drill results reported by Discovery Metals showed these constituted less than 17% of the drill hole length, and had a weighted average grade of 79 g/t AgEq. The highlighted higher-grade results with a weighted average grade of 231 g/t AgEq. covers only 2% of the drill hole length.
Furthermore, a review of cross sections with new drill results only added to the pessimism about whether the mineral resource grade could be sweetened. On the contrary, it was hard to understand how a mineral resource could have been defined in the first place with a prospective waste strip ratio below 1.0, and the suggested average grades. Holes in close proximity to each other had often distinctly different grades and large sections of internal waste.
The conclusion was that the 2019 drilling did not change Crux Investor’s negative conclusion of the PEA review.
Subsequent Developments
Since the valuation report, DSC has continued drilling, allowing it to declare an updated MRE in October 2021, with 87% of the contained metal in the Measured and Indicated (“M&I”) resource categories. Resources were declared for Oxide/Transition material assumed to be processed by heap leaching, and Sulphide material assumed to be processed by milling and flotation to concentrates. The MRE was followed quickly by DSC’s own PEA, with an NPV5 of a whopping C$1.16 billion and an internal rate of return (“IRR”) of more than 38%.
Drilling continued in 2022 to support a pre-feasibility study (“PFS”), which was completed with an effective date of 20 January 2023, and published on 10 February 2023, at the time indicating an NPV5 of C$1.5 billion. Duly encouraged the company embarked on delivering a Feasibility Study (“FS”) in the first half of 2024. This involved further drilling, metallurgical test work, studies relating to geotechnical and hydrogeological conditions, process design, electrical power provision, and tailings dam design. The FS report, effective 16 February 2024, and published 28 March 2024, arrived at an NPV5 of US$1.2 billion (= approx. C$1.6 billion), remarkably consistent with previous studies.
Figure 1_1 shows the share price performance of DSC on the Toronto Stock Exchange (“TSX”) since April 2019, when the company first became involved in the Cordero project.
The graph shows great enthusiasm for the Cordero project after its acquisition, partially explained by market expectations for a boom period for silver. After the Crux Investor report, there was a sharp decline, which is not necessarily related to the report’s conclusions. Positive drill results during 2021 caused a rising price, but since reaching C$2.52 in May 2021 there has been a downward trend, despite the very positive economic assessments in the PFS and FS. Recently the improving silver price has propelled the price upwards to its current C$1.17.
At the current market capitalisation of US$338 million, the company trades at a huge discount to the NPV of US$1.2 billion of the FS, a good reason for Crux Investor to delve deeper into the company.
Historical Financial Performance
Table 2_1 summarises the annual financial performance since 1 September 2019, the first year of involvement in the Cordero project.
The table shows that the company has incurred outlays of C$99 million on operational management and C$45 million on investments to advance Cordero. With C$189 million raised, fully covered by equity funding, the cash balance rose by C$46 million to a very healthy C$51 million by 31 March 2024. The cash balance has been kept relatively constant between C$46 million and C$67 million since 2020. Management obviously likes to hold a large funding buffer, far in excess of the annual burn rate.
Review of the Cordero Project
Background
The technical information and illustrations in this section were drawn from two NI.43-101 compliant technical reports, one by M3 Engineering & Technology Corporation (“M3”) in support of a PEA dated 18 April 2018 and another by Ausenco Engineering Canada ULC (“Ausenco”) reporting on the findings of a FS, dated 28 March 2024.
Unless specifically stated otherwise all information, illustrations, and wording have been extracted from these reports.
The Cordero project is located in the State of Chihuahua in north Central Mexico, approximately 200 km south of the city of Chihuahua, and approximately 35 km northeast of the mining town of Hidalgo del Parral (Figure 3.1_1).
The project is accessed via State Highway 24, with the last 10 km to site being on a gravel road.
The Cordero property consists of 26 mining concessions totalling 34,909 hectares (“ha”). Figure 3.1_2 shows the extent and outline of the tenement area, with the blue outline indicating where the resources have been defined.
The mineral rights have largely been secured by staking contiguous lode claims that cover approximately 37,000 ha. Only one small claim to the southeast of 22 (and coloured grey) is owned by another party, but is deemed of no consequence by DSC since it is far from the area underlain by the resources.
A small area along the southern edge of the reserve pit is covered by a royalty of 1%.
DSC claims to have access agreements in place to the surface areas that are important for being able to conduct mining operations.
Geology and Mineralisation
The Cordero project covers a belt that presently consists of seven known igneous intrusive centres aligned within a northeast trend 15 km on strike and 3-5 km wide (Figure 3.2_1).
The mineralisation at Cordero is related to these porphyry style intrusives, which shallow systematically toward the southwest end of the belt, from outcropping in the northeast, to being emplaced at kilometre depth in the southwest. In the PEA the presented SW-NE longitudinal section showed the individual intrusives as stocks that were progressively deeper emplaced going southwest. In the FS report this interpretation has changed to the bottom illustration in Figure 3.2_1.
The thick black line (with associated green colour for a dyke) in the longitudinal section above denotes the location of the Mega Fault, a major district-scale structure, which has a large downthrow of the western block. This has brought the intrusive phases emanating from the large quartz monzonite stock (in orange colour) down and into contact with the previously much deeper quartz monzonite.
Mineralisation within the Cordero resource is porphyry related within the northeast dominantly manto and skarn type mineralisation (= calcareous rock altered by mineralising fluids) and to the southwest of the Mega Fault, replacement type, stockwork veining and discordant, through going veins (1 m - 2 m widths) with up to 500 m strike lengths.
Figure 3.2_2 shows the conceptual model for mineralisation before being affected by structural deformation.
The source of the mineralisation are intrusives. Faults, fractures and lithological contacts provide the structural preparation and plumbing network through which metals can travel easily over long distances, as long as the fluid temperature and pressure remain high enough to keep them dissolved in solution. The NE-transcurrent faults (e.g., the Cordero Fault) acted as major conduits to focus hydrothermal fluid flow, and have influenced the location of mineralisation. Lithologic contacts, where crossed at high angles by fault and fracture systems, have influenced metal deposition as well as the chemical influence, through the development of more permeable alteration sequences. Breccias formed from a variety of mechanisms that create opportunities for fluid pressure to drop, and for metals to precipitate at those locations. In addition, changes in the width or direction of open fractures, faults, and bends along lithologic contacts, and changes in lithologic competency (how easily the rock fractures) create favourable environments for the development of extensional dilation zones that enhance fluid flow as permeability increases along the strike of a fault- bend (“dilational jog”), but may also create the possibility for these favourable environments to become less favourable as fluid conduits that tighten up under compression.
From the above description it is evident that the controls for mineralisation at Cordero are multi-faceted and complex.
The minerals of economic interest are dominantly silver bearing galena (PbS), sphalerite, and pyrite (FeS2) present in roughly equal proportions. Other minerals associated with silver are stibnite (Sb2S3), tetrahedrite ({Cu,Fe,Zn,Ag}12,Sb4S13) and arsenopyrite (FeAsS). These antimony and arsenic containing minerals could spell metallurgical trouble for an operation.
Drill hole information shows that oxidation of sulphides is generally present within 2-60 m of the present surface. Some narrow fracture zones are oxidised to depths of +600 m. Oxidation could add to metallurgical complexity. At the transition from oxidised to fresh rock there can be supergene enrichment over a vertical distance of 40 m.
Mineral Resources
The Cordero MRE is based on 793 drill holes contributing 310,861 m of sampled intersections. Figure 3.3_1 shows a map with the localities of the holes of the various drill phases for the Cordero resources area. In the densely drilled sections of the project, the spacing between neighbouring drill holes typically averages just below 50 m. However, northeast of the Mega Fault an area with a footprint that is approximately one-third of the pit outline, drilling is very sparse.
For the geological model, only those faults demonstrating significant displacements were chosen as the primary bounding surfaces of fault blocks. Consequently, this process led to the delineation of twelve distinct fault blocks, each terminated by major geological structures. A lithology model was generated and incorporated into these fault blocks.
For the grade estimation, adjacent fault blocks were merged if they contained similar mineralisation, and were maintained as separate fault blocks if there was a clear break in grade at the boundary. This resulted in two estimation domains for oxide and three for sulphide. Each of these domains further comprises two sub-domains: a high-grade sub-domain and a medium to low-grade stockwork domain. The establishment of these sub-domains involved modelling of grade zones, utilising trends specific to each of the six primary domains. These trends were determined based on a 30 g/t AgEq cut-off grade and structural considerations derived from fault and vein orientations.
Figure 3.3_2 shows the six domains for sulphide mineralisation.
Using 2 m sample composites and after grade capping the coefficient of variability (= standard deviation/mean) was generally well below 2, which is excellent for ordinary kriging. Variography showed significant anisotropy with a prominent NE-SW trend. The obtained semi-variograms are robust as shown in Figure 3.3_3, which contains an example of silver grade variance along the major axis.
For all metals, spherical two-structure models were employed to fit the experimental semi-variograms.
A block model was created using blocks measuring 20 m in the X direction (NE-SW), 5 m in the Y direction (NW-SE), and 10 m in the Z direction (vertical).
The input parameters used for the constraining pit shells of the Cordero mineralisation to meet the “reasonable prospects for eventual economic extraction” requirement, used a cut-off grade of US$7.25/t net smelter return for sulphide resources. The metal prices assumed were US$24/oz Ag, US$1,800/oz Au, US$1.10/lb Pb, and US$1.20/lb Zn. Metallurgical recoveries and off-mine charges were taken into account, with a mining cost rate of US$1.59/t mined, processing cost of US$5.22/t treated, and G&A cost of US$0.86/t treated.
Using the above parameters Ausenco comes to the following factors to convert grades into AgEq grades:
- 15.52 for Au grade (in g/t);
- 31.15 for Pb grade (in %); and
- 34.68 for Zn grade (in %).
Converting the cut-off grade from a monetary value to Ag Eq cut-off grade by simplistically dividing the NSR cut-off grade (i.e. US$7.25) by the value of 1 g/t Ag (i.e. US$24/31.1) would make it 9.4 g/t.
Table 3.3_1 is the resource statement for the Cordero project, effective August 2023.
The table shows that oxide resources comprise a very small portion of total resources accounting for 8% of the AgEq ounces. Inferred resources are also a minor component of total resources, which implies that not much can be expected for dropping the strip ratio by converting these to M&I resources.
When referring to Figure 3.3_4, it is surprising that Measured Resources are larger than Indicated Resources, given its relatively small surface expression and that Inferred Resources comprise such a small proportion of overall resources.
The technical report includes a large number of validation measures that all show impressive results. Figure 3.3_5 for example shows the close correlation between composite values and block estimates. How the graph functions is however not clear, as any block value is informed by many composite values.
However, comparing various sections raises some questions.
Figure 3.3_6 shows the traces of cross sections for which there are illustrations included in the technical report. Crux Investor has made annotations to enlarge the numbering to make it more readable and has included traces from other maps in the report.
The longitudinal section through the block model in Figure 3.3_7 is provided in the technical report as an illustration of the bulk nature of the deposit. Considering that all colours warmer than green are above the cut-off grade, it is a convincing picture. However, the section was carefully chosen through the most mineralised portion of the deposit. Moreover, it seems that the section is not vertical, but rather inclined to the northwest, which is one of the dominant directions of the mineralisation.
Unfortunately, the longitudinal section does not include boreholes and their grade intercepts to allow for comparison between estimated block grade and composite grades. This is only available for cross sections along coordinates with the pre-fix “CPL” in Figure 3.3_6 for which there are also separately available cross sections through the block model, but with very four grade intervals, the highest for block grades exceeding 20 g/t AgEq.
Figure 3.3_8 to Figure 3.3_10 compare information in cross sections along the coordinate traces in Figure 3.3_6. The cross section at the top gives borehole intersections and geology, the middle illustration is a cross section through the block model with four grade intervals, and the bottom cross section again through the final block model, but with five grade intervals. The bottom cross sections have been inclined to the northeast, again aligning it more with the mineralisation and overstating the true nature of it.
The first noticeable aspect is the low grades associated with the Cordero Fault, which is in contradiction to the genetic model for mineralisation. Also noticeable are large sections with very spotty and low grades, which are not well reflected in the block model sections. Finally, both sets of sections through the block model are generally similar, but with the bottom ones giving a higher average grade impression. As the cross sections have been chosen through the best mineralised portion of the deposit, it is hard to understand how the reserves using a 10 g/t AgEq cut-off grade could have been defined with a strip ratio of only 2.0 : 1
Mineral Reserves
The reserve estimation is based on mining of the Cordero deposit by conventional open pit mining utilising a traditional drill, blast, load, and haul sequence to deliver mill feed to the primary crusher, and to waste dumps located to the north and south of the proposed pits. The pit design is based on a 10 m bench height to match the resource model bench height.
The estimation of Mineral Reserves uses a cut-off grade of US$10/t (i.e. approx. US$3/t higher than for the conceptual mineral resource pit) and includes only high-grade oxides up to a maximum of 15% of the mill feed to keep metallurgical performance stable. The metal prices assumed are US$20/oz Ag, US$1,600/oz Au, US$0.95/lb Pb and US$1.20/lb Zn, which generally compare very low to currently prevailing prices. However, the operating cost provisions also are low for the type of operation. The overall slope angles vary from 42 degrees to 52 degrees, which cannot be considered conservative.
The estimation of dilution assumes a skin for ore/waste contact dilution of 1.3 m on average for a 10 m bench height. The overall effect is an additional 2.4% plant feed at a grade that is approx. 2.7% lower.
Figure 3.4_1 is a longitudinal section approximately 300 m NW of section B-B’ in Figure 3.3_4 through the centre and highest grade portion of the reserve pit. The colours warmer than yellow are for grades above 30 g/t AgEq.
No pit optimisation results graph is presented in the technical report. The mineral reserves statement is given in Table 3.4_1 together with the conversion ratios from M&I mineral resources for tonnage, grades and metal content.
Of the precious metal in total resources, more than 61% is captured in the reserves at a grade that is approximately 35% higher. Whereas an increase in cut-off grade would account for some average grade increase, the larger increase in average grade than cut-off grade must partially be due to a different shape of the pit from the conceptual mineral resources pit.
The oxide reserves contain less than 8% of the AgEq metal content and their impact is further reduced by DSC planning to leave a proportion untreated at the end of LOM. Therefore, when applying the definition of reserves strictly, the totals should be a little bit less.
Mining
Mining is planned by open pit methods including drilling, blasting, loading, hauling, and dumping employing an owner/operator fleet. Mining is completed on 10 m benches at a block size of 20 m x 5 m in plan view. Equipment size is relatively large, with haul roads designed to accommodate 190-220 tonne class haul trucks. Phases 1 and 2 target the highest-grade areas of the deposit near surface.
Two locations were selected for waste rock storage: one south of the ultimate pit limits and a second one on the northwest side of the pit. Approximately 122 Mt of the waste rock will be routed to the construction of the tailings facility’s embankment located east of the pit.
Provision has been made for two locations for stockpiling low-grade and medium-grade material, one for oxide, and another for sulphide material. Low-grade material is defined as having NSR values between US$10/t and US$15/t and medium-grade above US$15/t. With 12 material streams, four of which are directly to the mill, four to stockpiles, and the rest for disposal and construction, the operation will have to carry out substantial grade control activities. The plan is to rely on blast hole sampling, which Crux Investor deems to be risky as such sampling is often unreliable.
Metallurgy and Processing
Metallurgical Test Work
Since the PEA there has been a tremendous amount of additional test work completed. Three test work campaigns were carried out by Blue Coast Research, which focused on confirming and improving the optimised flowsheet developed for the PEA. The test work included comminution tests, potential acid generation (“PAG”) of the material, mineralogy, dewatering, reagent addition, optimal grind size and regrind size, and flotation testing on many master and variability composites comprising 90% sulphide and 10% oxide material. As iterations of the PFS and FS flowsheet have been proven on upwards of 90 various samples and composites from multiple lithological zones within the deposit, the technical report concludes that the selected flowsheet is robust and wholly suitable for the processing of all sulphide ores, and blended sulphide/oxide ores with an oxide blend component of up to 15%.
Much attention was given to obtaining representative samples across the pit, reflecting the lithological and grade distributions of the Cordero deposit.
Test work indicates that there is good liberation at a relatively coarse grind size of 80% passing (“P80”) 200 μm. For this reason, the comminution tests were at a grind size of 212 μm, which is coarser than the usual 106 μm grind size. However, the measured values were still high, being for the 75th percentile hardness 21.0 kWh/t. Whereas the PEA assumed low abrasiveness based on 2011 test work, tests in 2021 showed much higher values with the 75th percentile being medium abrasive.
Preconcentration resulted in high upgrades and high mass rejection, but at the expense of metal recovery and is too low to justify such a step.
Mineralogical examination revealed that pyrite is by far the most common sulphide mineral and galena and sphalerite are the main economic minerals.
As it was found that certain lithological units contain carbonaceous material that affected proper flotation, the process requires a carbon pre-flotation step. With sequential flotation of first lead, followed by zinc, it was found that ZnSO4 had to be added as a zinc depressant, and during the lead concentrate cleaning stages, after regrinding to P80 30μm, again ZnSO4 addition plus NaCN to depress pyrite. Conditioning for zinc rougher flotation involved the addition of NaCN to depress pyrite, with preparation for cleaning flotation involving regrinding to P80 35μm.
Crux Investor concludes from the above discussion that processing is not straightforward and will be relatively costly.
The discussion on recovery models has several relationships between head grade and proportion of metal recovered in the various concentrates. Crux Investor has made checks for the most important economical metals of the relationship shown, and the recoveries used in the FS cash flow model. In general, the values correspond with a slight optimistic bias.
Table 3.6.1_1 shows the forecast metallurgical performance over the LOM. The precious metal content in the concentrates is determined by the recoveries to these concentrates and the metal content of Pb and Zn of these concentrates (which determine the total amount of concentrate).
For the low grade of the plant feed, the suggested recoveries are very high. Were it not for the substantial test work Crux Investor would have attached some risk to the numbers.
Not shown in the table are the moisture contents of the two concentrates, being 7-9% for Zn and 11% for Pb. Of special concern here is that the Pb-concentrate exceeds the Transportable Moisture Limit (“TML”) which means that no captain will allow transport of the material on his ship. In the discussion on processing in Section 3.6.2, it is apparent that a dryer is included in the design to bring the moisture content further down.
Processing
The selected flowsheet includes a single-stage crushing circuit, with the crushed product (P80 71 mm in the first three years, 85 mm later) reporting to the crushed ore stockpile. Ore is reclaimed to a grinding circuit consisting of a semi-autogenous (“SAG”) mill and a ball mill circuit operating in closed circuit, with a cyclone cluster to reduce the particle size to P80 200 μm.
Ground ore will report to a carbon pre-flotation circuit to remove carbonaceous material before feeding a two-stage rougher flotation circuit. Lead and silver minerals will report to the rougher concentrate of the first stage, while zinc minerals will report to the concentrate of the second stage via the tailings of the first stage. Lead-silver and zinc rougher concentrates will report to dedicated regrind circuits for further size reduction to P80 35 μm for lead concentrate, and P80 30 μm for zinc concentrate, to facilitate sulphide minerals liberation. The reground rougher concentrates will be treated in dedicated cleaner flotation circuits producing final lead-silver and zinc concentrates of requisite quality.
The final concentrates will then report to dedicated dewatering circuits that include high-rate thickeners and vertical plate-and-frame filter presses. For the lead-silver concentrate, the dewatering circuit also includes a dryer to ensure the target moisture of the cake for transportation. The resulting filter cakes will be handled by front-end loader(s) for stockpiling and loadout activities. The tailings from the process will be thickened in a high-rate thickener and pumped overland to the tailings management facility.
Economic Evaluation – Cordero Project
Economic Assumptions and Marketing Terms
The spot prices on 29 April 2024 of US$2,327/oz Au, US$31.34/oz Ag, US$1.02/lb Pb and US$1.38/lb Zn were used as the base case metal prices.
Table 3.7.1_1 reproduces the marketing terms assumed by Ausenco in the FS, which have been adopted, as these are generally in line with conventional terms. Penalty terms have been ignored as the metallurgical plant feed and metallurgical performance provided are not sufficient to calculate the content of deleterious metals in concentrates.
Crux Investor records that all marketing terms are improvements on what was assumed for the PEA.
Table 3.7.1_2 shows the relative contribution of each metal to at-mine revenue, and the implication for the silver equivalent grade.
With the much higher spot silver price compared to base metal prices, the base metal contribution to silver equivalent grade drops, making the Cordero project even more of a silver project. For all intents and purposes, the gold grade is immaterial despite the record spot gold price. This is the result of the very low feed grade and low metallurgical recovery, resulting in a metal content in the concentrate for which little is paid.
The Cordero project in its current format is an extremely low-grade silver project relying on silver contributing 49.8% (FS), or 55.3% (this valuation), to the at-mine revenue.
When referring back to the conversion factors suggested by Ausenco on page 11 under Section 3.3 for the MRE, it is evident that far too high weightings were given. Converting the revenue contribution of each metal to calculate AgEq grade gives 10.4 for Au, 17.1 for Pb, and 21.0 for Zn.
In addition, it is hard to reconcile the 57.7 g/t AgEq average grade of the FS in the table above with the picture presented in Figure 3.4_1, where only a very small proportion of blocks are orange, which indicates +50 g/t AgEq grade.
Production Schedule
The production schedule envisages mining of 347 Mt of oxide and sulphide material over 17 years, feeding the mill with higher grade material, and stockpiles with lower grade material, to feed the plant with as high grade as possible in the early years. After the cessation of mining, there will be two years of stockpile reclaim. As the plant’s performance can cope with maximal 15% oxide material, there will be 19.3 Mt oxide material left untreated at the end of LOM.
The total waste tonnage in the reserves mine plan is 696 Mt and this will be delivered to either the tailings storage facility or the rock storage facility. The overall waste-to-ore strip ratio during mining is 2.0:1, which increases to 2.2:1 when the 19.3Mt of low-grade oxides left in the stockpile facilities are considered as waste.
DSC has opted for a phased approach to developing the Cordero project. It seems that lately, this is becoming a popular approach in the mining industry. The probable reason is a reduction in initial capital expenditure improving the chances for a small company to raise funding. As with its review of Artemis Gold Corporation (“Artemis”) Crux Investor repeats its opinion that on paper a phased approach may work, but in practice it is fraught with risk and difficulties.
The staged expansion of the process plant over the LOM is as follows:
- Phase 1 (Year 1 to 3) – The process plant will be operated at an average nominal throughput of 25.5 kt/d (9.6 Mtpa), and is designed to account for variable ore hardness;
- Phase 2 (Year 4 to 6) – The plant will be expanded to process material at an average nominal throughput of 51.0 kt/d (maximally 19.2 Mtpa), and is designed to account for variable ore hardness; and
- Phase 3 (Year 7+) – The zinc cleaning and concentrate dewatering circuits will be expanded to process higher zinc grades in the feed material at the average nominal throughput of 51.0 kt/d (19.2 Mtpa).
Figure 3.7.2_1 shows as top illustration the total material mined per pit phase, and below the sources of plant feed over the LOM, illustrating the substantial rehandling included.
Total mine production is relatively constant from year to year, in particular when rehandling volumes are considered. Total reclamation over the LOM is 122 Mt, which substantially adds to the material handling requirement. Is all the capital lock-up and rehandling cost worth it? Figure 3.7.2_2 shows the difference between the mined grade and the milled grade (both expressed in g/t AgEq) over the LOM.
The milled grade substantially exceeds the mined grade until Year 8, almost 25% higher on average. Given the time value of money and the risk reduction from optimised early cash flow, Crux Investor concludes that the high grading is worthwhile in the case of the Cordero project.
Capital Expenditure Structure
Table 3.7.3_1 summarises the forecast capital expenditure for initial project development, the two expansions, and sustaining capital expenditure.
The relatively low outlay on the mine fleet is explained by it being financed with only a 25% down payment, and the remainder applied to operating costs with a provided interest rate of 10.25%. To Crux Investor it is incomprehensible that the regulatory authorities allow such assumptions, as it makes a joke of the requirement for economic analyses to be on a full equity basis. The Cordero FS mixes operational risk and financial risk. Whereas the technical report shows considerable haul truck additions to the mine fleet associated with expansions, there is no provision in the table for this.
The forecast expense of the construction of the process plant amounts to a cost of only US$320/t monthly capacity when including the contingency provision of US$45.3 million. This is far lower than conventional rates. A good rule of thumb is between US$650 and US$750/monthly tonne. As the process flow is not particularly simple, with flotation circuits for two products after rougher flotation and including a regrinding step, plus the need for substantial drying, the plant’s capital cost will not be that different from the conventional cost rate. This valuation has added another US$260 million to the initial plant expense. The expansions cost US$232 million per additional monthly capacity. This is very low, and would only be explainable if the initial construction provided for many items (e.g., earthworks, etc.) for these expansions, but that should be reflected in the initial capital expenditure, which itself is too low. Crux Investor has added US$400 million for the expansions.
Considering the very optimistic bias in the provisions for mining and processing activities, Crux Investor suspects that the same applies to infrastructure and other categories. However, without sufficient insight into the scope of work, there is no objective basis to amend the provisions.
Closure costs are estimated at US$137 million, but the technical report includes salvage credits of US$62 million for a net outlay of US$75 million. Although Crux Investor considers it imprudent to include such high salvage costs, it has accepted the net closure cost amount.
There is a small difference of US$0.26 million between the total capex in Table 3.7.3_1 and in the cash flow model, which is due to rounding.
Forecast Cash Operating Cost
As for the capital expenditure, suggested cost rates for operating activities look very optimistic.
Table 3.7.4_1 summarises the Ausenco rates and shows the amendments made for this study.
Crux Investor has referred to the actual cost at two other Mexican operations, Camino Rojo, an open pit operation with heap leaching, and the Los Filos Mine complex which has an open pit and underground component and heap leaching.
The Camino Rojo FS provided for a mining cost rate of US$1.77/t. After applying this and cost rates of US$3.20/t heap leached and US$1.6/t heap leached to actual 2023 production, the total calculated cost reconciled with the actual reported cost. The open pit mining cost rate at Los Filos was forecast at US$1.38/t in a FS dated 19 October 2022. However, the reported actual 2023 mining cost was US$2.08/t.
Crux Investor concludes that a mining cost rate of US$2.35/t, including US$0.35/t for financing, is reasonable.
Processing cost of US$6.28/t for treating material that is hard, medium abrasive, requiring treatment in several flotation circuits, and requiring additional drying, is very low. Crux Investor has amended this to US$10/t treated.
Similarly, a G&A expense of US$10 million per annum for an operation of the size of Cordero is not credible. At Camino Rojo, a simple heap leach operation mining a total of 11.6 Mtpa, of which 6.8 Mtpa is processed, has annual G&A expenses of US$11.2 million. Los Filos has an annual G&A of US$36.5 million. It is however a much more complex operation than Camino Rojo, involving mining 48.9 Mtpa (note: less than Cordero), some of which are from underground and treated by heap leaching.
Based on the above Crux Investor has provided US$20 million for G&A during Phase 1, reaching US$30 million for Phase 3.
Working Capital
Being an operation that will be producing base metal concentrates, which need to be treated and refined, the product pipeline will be considerable, and investments in working capital will be relatively high. Table 3.7.5_1 summarises the assumptions for the various items.
The total investment has been assumed recovered at the end of LOM, ignoring obsolesce and pilferage.
Royalties and Taxation
With only a very small portion of the area covering reserves subject to royalties to private parties, this valuation has ignored this as negligible.
The tax regulations in Mexico for mining companies include:
- An “environmental protection fee” of 0.5% on gross revenue for precious metals;
- A “Special Mining Tax” at 7.5% of the Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA). This charge is deductible for income tax purposes;
- Amortisation of pre-production investment to a 10% rate on a straight-line basis, allowing for accelerated depreciation when the LOM is shorter, resulting in full depreciation upon mine closure. The PEA uses a 10% rate for amortisation, but a 12.5% rate for depreciation of sustaining capital expenditure;
- The income taxes are currently 30%; and
- Tax on expatriation of dividends is 10%.
Results
Figure 3.7.7_1 shows the forecast financial performance over the LOM for two scenarios: the DSC FS, and this valuation.
The model for FS parameters has a different structure from the technical report by including for example off-mine charges in the calculation of at-mine revenue, and not accounting for it as an operating expense. The critical values to test whether or not the result is similar are taxes and net free cash flow. Crux Investor arrives at 6% higher taxes and 5% higher net free cash flow. From this it can be concluded the Crux Investor model is a reasonably accurate reflection of the FS model, but with an optimistic bias.
The table above indicates that for the FS assumptions the operation has a cash margin of almost 53%, which is usually indicative of a project that will give a decent return. Ausenco arrived at an NPV5 of US$1,177 million on an after-tax basis, which is 3% lower than the Crux Investor cash flow model. However, with Cordero being at project stage using an 8% discount rate is more appropriate.
The highlighted cells indicate the numbers that differ substantially from the FS, or were not accounted for by the Ausenco FS. The much higher spot metal prices more than compensate for the cost amendments by Crux Investor, with EBITDA substantially higher than the FS. However, the cash margin drops to just above 51.6%. What badly affects the net free cash flow is much higher assumed capital expenditure, inclusion of tax on repatriation of taxes, and corporate expenses in Canada. The Crux Investor valuation has 4% lower net free cash flow, which discounted at 8% has a value of US$518 million. As the NPV8 is only 60% of the required initial capital funding and the undiscounted payback period is 7.1 years, the Cordero project cannot be rated as attractive.
Table 3.7.7_2 shows the sensitivity of the net present values for various discount rates to the main input parameters.
The table illustrates the very marginal nature of the project with small changes in input values resulting in major changes in value. For a one percentage point change in the metal prices the NPV8 increases by 7.7% (i.e. US$39.9 million) and a one percentage point change in the cash operating cost (i.e. US$0.19/t treated) results in an 3.1% change in NPV8 (i.e. US$16.0 million), with a lower sensitivity for capital expenditure: 2.3% for every percentage point change.
Valuation of Discovery Silver Corporation – 29 May 2024
On 29 May 2024 the shares were trading at C$1.17 which converts to a market capitalisation of C$464 million given the 396.6 million issued shares.
No warrants were outstanding on 31 March 2024, but 19.3 million options were, of which 6.4 million were in the money, at an average exercise price of C$0.48. Restricted Share Units (“RSU”) of 5.7 million shares, and 2.4 million Deferred Share Units (”DFU”) were also outstanding.
At the end of March 2024, the net current assets amounted to C$42.9 million.
Based on the above information the Enterprise Value of DSC on a diluted basis is derived in Table 4_1.
The diluted Enterprise Value equals 62% of the NPV8 of this valuation. Whereas the DSC share price has lately risen on the back of the sharply improving silver price, the market is holding back on its re rating.
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