Introduction

We have been in a 21-month correction for this gold/silver bull market. Some would argue that this PM (precious metals) bull market is over. But in my mind, as long as $1680 holds for gold and $18.50 for silver, the PM bull market is only correcting.

At some point, I expect this correction to end and for silver to break out. When that happens, many silver projects will push their share prices higher. If there is one thing I have learned investing in PM miners, it is that quality projects are what drive the share price to obtain outsized gains.

That is why I am always looking for quality. In this article, I will give you an overview of three development projects that I think are of the highest quality. One of them (Aya) is a small producer but is currently developing a large high-grade discovery. The other two are advancing spectacular discoveries into their first mines.

I like big, long-life mines that can generate significant FCF (free cash flow). A producing silver miner is always valued by its FCF. It can have a low FCF multiple of perhaps a 5 if it isn’t that exciting and has several red flags. It can have a high FCF multiple of perhaps 25 or 30, if it is a rare company that investors love. The sweet spot is somewhere between 15 and 20 for a quality large mid-tier producer.

All three of these companies should become large mid-tier producers or majors. Thus, if they can generate high FCF and get a 20 multiple, the upside potential is very high for all three. This is why I like to chase FCF. If a company can achieve high FCF and the price of silver trends higher, then the returns should be substantial.

Of course, silver mining is extremely risky. With those large potential returns come high risk. A myriad of things can go wrong. This is the reason these three stocks are all currently cheap versus their potential. Investors are not going to assume they will obtain high FCF. Thus, they have to prove it, and the price of silver has to rise.

SilverCrest Metals

SilverCrest Metals is advancing its large silver mine (Las Chispas) in Mexico. It has 6 miles of underground workings and 14 known veins. The resource size is 120 million oz. (800 gpt silver equivalent including gold) and is growing in size. They have a high FD market cap of $1.1 billion. You may think that’s a bit pricey, but with exploration success, it is cheap, and Las Chispas is growing in size.

The PFS (pre-feasibility study) was excellent. The after-tax IRR is around 50% at $19 silver, with a 1-year payback. The reason for the high IRR is low all-in costs (free cash flow) of around $13 per oz (I expect it to be a bit higher). Plus, the capex is only $140 million to produce about 10 million oz. (silver equivalent including gold). That production total is likely to increase based on their current drill results.

The mine is under construction, with first pour due in Q4 2022. This is a strong company with very good management. Their strategy is to find and develop mines. Investors who got in early were very lucky. The only red flags for this stock are that it is not cheap, plus the high grade and exploration potential make them a takeover target. We don’t want a large major to acquire it for a small premium.

Company Info

Cash: $142 million

Debt: $120 million

Current Silver Resources: 120 million oz. (800 gpt AGEQ including gold).

Estimated Future Silver Resources: 150 million oz.

Estimated Future Silver Production: 10 million oz.

Estimated Future Silver All-in Costs (break-even): $15 per oz.

Source: www.silvercrestmetals.com and www.goldstockdata.com

Scorecard (1 to 10)

Properties/Projects: 8

Costs/Grade/Economics: 8

People/Management: 7.5

Cash/Debt: 7

Location Risk: 7

Risk-Reward: 8

Upside Potential: 7.5

Production Growth Potential/Exploration: 6.5

Overall Rating: 7.5

Strengths/Positives

Low costs/High grade

Significant upside potential

Exploration potential

Good management

Risks/Red Flags

Takeover target

Not cheap

Mexico is not as mining friendly as it used to be

Valuation ($75 silver prices)

Production estimate for the long term: 10 million oz. (AGEQ)

All-In Costs (break-even): $15 per oz.

10M oz. x ($75 – $15) = $600 million annual FCF (free cash flow)

$600 million x 10 (multiplier) = $6 billion

Current FD market cap: $1.1 billion

Upside potential: 450%

Note: I used a $75 silver price to identify their future value because I am a long-term investor who plans to wait for higher silver prices. I feel that $50 is not a high enough target and that $75 is realistic in the next 3 years.

Note: My All-In Costs are the expected costs that will generate FCF (free cash flow).

Note: I used a future FCF multiplier of 10 to be conservative. It’s likely that the quality silver miners in Mexico will have higher multiples at $75 silver.

Risk/Reward

The main risk is the silver price. Unless it rises, it is never easy making money in silver miners. In fact, a volatile silver price will likely put you underwater at some point, and perhaps significantly down. Another risk factor is Mexico, where you can have roadblocks that shut down the mine. Taxes and royalties can increase and zap the share price. Inflation or other factors can push up costs. A myriad of things can go wrong.

To take on that risk, the reward has to be high. A 100% return, in my opinion, is simply not enough for accepting high risk. We want outsized returns. For SilverCrest, I think those outsized returns are likely if the price of silver trends higher. Anything above $40 and SilverCrest should take off like a rocket ship.

Investment Thesis

Large high-grade silver projects are rare, especially in good locations. Mexico isn’t ideal but hasn’t become a red flag yet. Las Chispas has high grade with low cash costs. That means it will likely always generate FCF. With higher silver prices, it will have excellent leverage and outperform most silver miners. They didn’t need a lot of debt to build such a large mine. Once that debt is gone and they accumulate cash, they can purchase a second or third project.

Discovery Silver

Discovery Silver is advancing a large silver project (Cordero) in Mexico. Cordero has about 1.5 billion oz. of AGEQ (60 gpt), with significant offsets of lead, zinc, and gold. They are focusing on higher grades to improve the economics (about 500 million oz. at 90 gpt AGEQ).

They released a PEA in 2021. They plan to mine 25 million oz. (AGEQ) annually at around 100 gpt (AGEQ), with an AISC around $13 (this will increase by the time they get to production). This is their starting pit, and production will likely increase.

The economics are surprisingly good for their low grade. The after-tax IRR is 38% at $22 silver. As long as silver prices are above $25, I think it can get financed. The payback is less than 2 years. Because of their high production, Cordero has huge leverage as silver prices rise. If silver is over $30, the payback period is only 1 year. They have been finding higher grades and new discoveries on Cordero’s large property (85,000 acres). They drilled 50,000 meters in 2021, which has not been added to the PEA. Recent drill results have been excellent.

They plan to do a PFS (pre-feasibility study) in 2022 and an FS (feasibility study) in 2023. They will also be permitted in 2022-23. We could have a construction decision as early as next year. The management team appears to be competent and ready to build the mine. They have 35% insiders, with management and founders owning 10% of the shares and Eric Sprott with 25%. I don’t think they will sell early and want to take this to production.

If we assume silver reaches $75, they could expand production to mine 1+ billion oz. Annual production could be massive. Let’s assume they reach 35 million oz. of AGEQ annual production. That would generate free cash flow of around $1.5 billion per year. Using a 10x multiplier, that values the company at $15 billion. So, you can see how much leverage they have to higher silver prices.

Company Info

Cash: $47 million

Debt: $0

Current Silver Resources: 500 million oz. (100 gpt AGEQ).

Estimated Future Silver Resources: 500 million oz. (AGEQ)

Estimated Future Silver Production: 25 million oz.

Estimated Future Silver All-in Costs (break-even): $20 per oz.

Source: www.discoverysilver.com and www.goldstockdata.com

Scorecard (1 to 10)

Properties/Projects: 8

Costs/Grade/Economics: 7

People/Management: 7

Cash/Debt: 7

Location Risk: 7

Risk-Reward: 8

Upside Potential: 8

Production Growth Potential/Exploration: 7.5

Overall Rating: 7

Strengths/Positives

Significant upside potential

Exploration potential

Production growth potential

Risks/Red Flags

Timeline until production

Low grade (dependent on offsets for economics)

Mexico is not as mining friendly as it used to be

Valuation ($75 silver prices)

Production estimate for the long term: 25 million oz. (AGEQ)

All-In Costs (break-even): $20 per oz.

25M oz. x ($75 – $20) = $1.4 billion annual FCF (free cash flow).

$1.4 billion x 5 (multiplier) = $7 billion

Current FD market cap: $564 million

Upside potential: 1,100%

Note: I used a $75 silver price to identify their future value because I am a long-term investor who plans to wait for higher silver prices. I feel that $50 is not a high enough target and that $75 is realistic in the next 3 years.

Note: My All-In Costs are the expected costs that will generate FCF (free cash flow).

Note: I used a future FCF multiplier of 5 to be conservative and to adjust for the high capex.

Risk/Reward

The main risk is the silver price. Unless it rises, it is never easy making money in silver miners. In fact, a volatile silver price will likely put you underwater at some point, and perhaps significantly down. Another risk factor is Mexico, where you can have roadblocks that shut down the mine. Taxes and royalties can increase and zap the share price. Inflation or other factors can push up costs. A myriad of things can go wrong.

This project will require higher silver prices to get financed because of the high capex (around $400 million). Plus, you never know how companies will finance their projects. It’s easy to throw shareholders under the bus and do ugly streaming deals.

To take on that risk, the reward has to be high. A 100% return, in my opinion, is simply not enough for accepting high risk. We want outsized returns. For Discovery Silver, I think those outsized returns are likely if the price of silver trends higher. Unfortunately, we will need to wait until they close to production (probably 2025) until we see full valuation.

Investment Thesis

Large silver projects are rare, especially in good locations. Mexico isn’t ideal but hasn’t become a red flag yet. Cordero is a low-grade project but is economic in the low $20s. That adds some risk, but the optionality at higher silver prices makes it extremely attractive. Plus, this is only the starter pit, they have enough resources to expand production.

Unfortunately, the capex is high at around $400 million, and with inflation, it could easily increase substantially before they get to first pour around 2025 or 2026. It’s a large mine, so the build will probably take at least two years.

Aya Gold & Silver

Aya Gold & Silver is an emerging mid-tier silver producer in Morocco. Their Zgounder project has a 100 million oz. resource (300 gpt). They are producing about 1.7 million oz. per year, and they plan to increase production to 8 million oz. in 2024. The capex is $140 million, and construction begins in 2022. They have $84 million in cash and no debt. They will need to raise about $60 million to complete construction.

The AISC for the expansion is only $10 per oz., although I’m projecting their break-even costs to be around $18 per oz. They have 96 million oz. of M&I at 300 gpt, and 70 million oz. of reserves. Zgounder continues to grow rapidly in size from high-grade drill results. They will likely expand production at least once more.

After production expansion in 2024, they can use their cash flow to expand the resource at Zgounder and focus on Boumadine and Amizmiz for growth. Amizmiz is their gold project and has significant potential. It is a 350,000 oz. resource at 13 gpt. That is a very good grade, and they think they can find a lot more. Plus, they have another gold project (Tijirit), although it currently is only 200,000 oz. I’m only including Zgounder and its current resources in my valuation.

Boumadine is a past-producing mine (1992) with 25 million oz. of silver, plus offsets in lead, zinc, and gold. A PEA was recently completed that was very favorable. The PEA had an IRR of over 100%. It has a low capex under $50 million to produce around 3 million oz. per year.

Currently, Morocco is mining-friendly and stable, but it is in North Africa, a place of political turmoil. I like Zgounder’s high grade and exploration potential, but I’m concerned about the political risk, although right now it appears to be a mining-friendly location.

It is somewhat tightly held, with only 116 million shares and 55% insiders. They won’t give it away for a low premium.

Company Info

Cash: $84 million

Debt: $0

Current Silver Resources: 100 million oz. (300 gpt AG).

Estimated Future Silver Resources: 100 million oz.

Estimated Future Silver Production: 8 million oz.

Estimated Future Silver All-in Costs (break-even): $18 per oz.

Source: www.ayagoldsilver.com and www.goldstockdata.com

Scorecard (1 to 10)

Properties/Projects: 8

Costs/Grade/Economics: 7.5

People/Management: 7

Cash/Debt: 7.5

Location Risk: 7

Risk-Reward: 8

Upside Potential: 7.5

Production Growth Potential/Exploration: 7.5

Overall Rating: 7.5

Strengths/Positives

Significant upside potential

Exploration potential

Production growth potential

Moderate costs

Risks/Red Flags

Location. Morocco is in North Africa.

Costs could increase.

Valuation ($75 silver prices)

Production estimate for the long term: 8 million oz.

All-In Costs (break-even): $18 per oz.

8M oz. x ($75 – $18) = $450 million annual FCF (free cash flow)

$450 million x 8 (multiplier) = $3.6 billion

Current FD market cap: $594 million

Upside potential: 500%

Note: I used a $75 silver price to identify their future value because I am a long-term investor who plans to wait for higher silver prices. I feel that $50 is not a high enough target and that $75 is realistic in the next 3 years.

Note: My All-In Costs are the expected costs that will generate FCF (free cash flow).

Note: I used a future FCF multiplier of 8 to be conservative.

Risk/Reward

The main risk is the silver price. Unless it rises, it is never easy making money in silver miners. In fact, a volatile silver price will likely put you underwater at some point, and perhaps significantly down. Another risk factor is Morocco, which is in an area of the world prone to uncertainty. Also, taxes and royalties can increase and zap the share price. Inflation or other factors can push up costs. A myriad of things can go wrong.

To take on that risk, the reward has to be high. A 100% return, in my opinion, is simply not enough for accepting high risk. We want outsized returns. For Aya, I think those outsized returns are likely if the price of silver trends higher. Unfortunately, we will need to wait until they increase production (2024) until we see full valuation.

Investment Thesis

Large silver projects are rare, especially large high-grade projects. Morocco isn’t ideal but is currently mining friendly. Zgounder is a high-grade project and is economic in the mid-teens. That lowers the risk, plus the optionality at higher silver prices makes it extremely attractive.

I like the fact that they have a strong pipeline. Not only is Zgounder likely to grow in size, but they have several other projects that are promising. I think the upside potential will exceed my forecast if we reach $75 silver and it stays there.

Conclusion / Takeaway

All three of these stocks have similar risk-reward profiles. They have big upside potential based on rising silver prices which can bring high FCF (free cash flow) leading to re-rating of the stock. SilverCrest has the lowest risk because it is close to production. Aya would have the next best risk level because it is getting closer to production expansion. Discovery has the most upside potential but is a much longer wait for production.

Another risk factor is that development projects are often taken out by larger mining companies for a small premium (reducing our expected payout). This is why I prefer to own all three. Not all of these will make it to first pour before getting taken out.

All three have big upside potential and with that upside comes high risk. A development stock is never a slam dunk. The price of silver will be the most important factor for returns and it is impossible to predict what silver prices will do. For this reason, investing in silver miners is speculating. We could win big, but we could also lose.