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Silver eggs and red squirrels

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Guest post: Simon is a director of Arlington Group Asset Management Limited. He has over three decades of investment banking and capital markets experience between Canada, the UK and Australia.


I always knew when Tony Fell, one of the most important bankers in Canadian history, was visiting our London office at RBC.

Royal Bank of Canada’s offices in the late 90’s were at 71 Queen Victoria Street, an awkward shaped 7-story building, surrounded by large impressive towers of steel, glass and reinforced concrete.

In the basement lift well of 71 QVS, as the remodeled building is now known, was a plaque that told the curious that this was the site where Canadian Beaver pelts from Hudson Bay first returned to be traded in the City of London in October 1669. 

Thomas Glover, then one of London’s most prominent furriers bought most of the pelts in the precious cargo, which fetched £1233, thus proving the viability of the fur trade from Hudson Bay. And so, the Hudson Bay Company — the Honorable Company of Adventurers — was founded in May of 1670 by King Charles II. 

In 1999, some 330 years after those first precious furs made their way up the Thames River, after a cool and windy walk from Bank Station, cradling a cup of coffee and a sandwich bag, I would take the lift to the 5th floor of RBC’s European headquarters.

The 7am shift was a privilege reserved for the newest kid on the desk. I had joined Royal Bank of Canada in 1998, after a four year apprenticeship with Aussie broker Hartley Poynton in Sydney, and was part of RBC’s global mining group run from Toronto by Ernie Nutter, who went on to successfully lead Capital Groups mining fund management for 12 years.

The fluorescent overhead lights flickered on as I crossed the darkened 5th floor.

It was 2am back in Toronto as I set down my coffee on the dealing desk and wondered who was the well-dressed stranger with slicked backed hair reading some RBC research, with a Financial Times pink broadsheet spread out on the equity dealing desk in front of him.

It was like finding a scary, immaculately suited intruder in your living room when Tony came to visit his London worker bees. Didn’t the man sleep???

Tony was a student of the markets with wide ranging interests and decades of experience at the top. He knew many of the important CEOs and Chairpersons of Canadian companies, for example Barrick, Inco and Cameco, on a first name basis. I would venture, from our house research view, Tony could tell you what management actually thought from just his recent lunch or dinner meeting!

I asked Tony his favorite ideas, expecting a Buffett-like answer on diversification and value investing. He surprised me when he explained his approach: “Put your eggs in a basket and watch them carefully.”

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It’s been 24 years since hearing Tony’s advice on the Royal Bank of Canada dealing floor. The great man has retired, and RBC is Canada’s most valuable corporation with a market capitalisation of over C$140 billion.

I’ve made and lost a few fortunes, given away three houses to ex wives and girlfriends (you were worth every cent honey(s)). Not a week has gone by in thirty years of analyzing and investing in mining shares that I haven’t swapped ideas and thoughts with my friends and industry colleagues. 

I have NEVER seen an opportunity like investing in SILVER explorer, developers and miners TODAY. Silver leads the commodity pack with a ~30% year to date return versus copper at ~20% and gold at ~12%, according to Hartnett from BofA’s weekly Flow Show.

Other industry insiders agree. This past week in London, a friend at the world’s largest mining fund mentioned he had 1/4 of his pension fund invested in physical silver. Another successful mining industry stock picker, whose personal account is larger than some funds, described to me his investment thesis on Coeur Mining with a price target x10 his average entry around US$4.00 per share. I agree.

This is the greatest precious metal bull market EVER.

Here are two important charts courtesy of Raymond James who recently hosted a silver day in London:

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“Tony, I have followed your advice and bought myself THREE SILVER EGGS.”

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  1. First silver egg:

Coeur Mining (CDE US$5.75, US$2.3 billion mkt cap) was formed in 1928 to mine silver in the Coeur d’Alene region of Idaho, USA. To say Coeur Mining is a long term steward of shareholder value is a bit like saying the introduction of the grey squirrel to the UK around 1876 was good for the red squirrel.

Grey squirrels were imported from the United States as an ornamental species to populate the grounds of stately homes in the United Kingdom. The grey squirrels compete with the red for food and habitat — and this was bad news for the United Kingdom’s red squirrel population which, since 1870, has declined from about 3.5 million to 120,000.

Disturbingly, you would rather have been a red squirrel than a Coeur Mining shareholder since 1990 when Coeur’s share price peaked at US$288.77 versus $5.80 today. Approximately 3% of red squirrels have survived the onslaught of the omnivorous grey squirrel compared to only 2% of residual value for the Coeur Mining shareholder measured from 1990 to today.

The late Dennis Wheeler, who passed in 2019, took the helm of Coeur in 1989 and ran the company for almost 25 years until his retirement in 2011. Wheeler took Coeur from a company that started in his grandparents bakery and built it into a $2 billion enterprise, according to his former colleague of twenty years, Tony Ebersole.

Dennis retired as President and CEO of Coeur on July 11th 2011, exactly 3 months after the all time peak for silver on April 11th at $49.50 an ounce. The silver price rallied ~ 1000% from about $5.00 per ounce during Dennis’ tenure at Coeur. Dennis was an empire builder buying over ten other companies and mineral assets during his time as CEO of Coeur. 

Coeur Mining Share price versus share issuance since August 1990:

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Coeur shares on issue, like the grey squirrel, experienced a population explosion, while being a red squirrel, or a Coeur shareholder, has almost been an extinction event.

In 2023, Coeur produced 317,000 ounces of gold and 10.3 million ounces of silver or ~ 35 million silver equivalent ounces. Bank of Montreal (BMO) forecast that, by 2025, Coeur will grow production ~ 30% to 46 million silver equivalent ounces per year. Silver will make up ~ 1/3 or 15 million ounces of 2025 production.

In their May 3rd 2024 note, BMO research says:

“We see Coeur nearing a FCF inflection point, with the Rochester [mine] expansion targeting nameplate production by the end of Q2/24. We expect the shares to trade at improved multiples as cash flows increase and leverage decreases. Coeur has good diversification with production from mines situated across the Americas.”

I note the BMO use an industry standard ‘rearview mirror’ commodity price forecast of $2099/ounce for gold and $25.25 for silver in 2025, which derives $400 million EBITDA assuming All In Costs of just less than US$20/ounce of annual silver production according to BMO.

Now, imagine the silver price went to its all time highs at ~ $50/ounce versus BMO $25/ounce forecast in 2025. That would add another — 15×25 = 375 — $375 million of annual EBITDA to Coeur, assuming all else equal. That’s US$8 billion of implied value assuming a x10 multiple for a liquid, diversified, silver growth company with 400 million shares out implies a US$20 share price target which is 350% above recent Coeur share price of $5.75 per share. Behold the revenge of the red squirrel!!

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  1. Second silver egg:

Discovery Silver (DSV $1.02, C$405 million mkt cap) 

There is only one Cordero: Discovery Silver’s 100% owned future 33 million ounce per year silver equivalent producer and world’s largest undeveloped silver reserve at 302 million ounces in Chihuahua State in Mexico.

The Net Present Value (NPV) of the Cordero Project from Discovery Silver’s February 2024 Feasibility Study at US$30, $40 and $50 an ounce silver, is approximately US$2.1 billion, US$3.0 billion and US$3.9 billion. Choose your silver price, Discovery Silver is worth x7, x10 and x13 its current market capitalization at $30/oz, $40/oz and $50/oz silver price.

Cordero will produce more silver with one mine than Coeur produces with 5 mines. The outgoing Mexican President Amlo proposed a ban on future open pit mines so the policy of the new Mexican President Claudia Sheinbaum will be closely watched. Discovery Silver expect to get their final permits in the first half of 2025.

Tony Makuch who runs Discovery Silver is a proven money maker for shareholders having successfully sold Kirkland Lake to Agnico Eagle in a $22 billion ‘merger of equals’ in February of 2022.

  1. Third silver egg:

Mithril Resources (MTH A$0.21, A$20 million mkt cap) are the highest grade of all their peers on the Australian and Toronto Stock Exchanges with a 530,000 ounce resource at 7gpt gold equivalent or over 500gpt silver equivalent at the current 73:1 ratio of gold to silver. Mithril’s project is located in the home of the world’s biggest and best silver projects, the ‘Sierre Madre’ in Mexico.

Mexico produces 24% of the world’s silver supply, or almost as much silver as the no 2 and no 3 producers, China and Peru, combined. 

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Management of Mithril, led by CEO John Skeet, have ‘done it before’. John was Director of Projects for ten years at Bolnisi Gold and part of the discovery team that founded the Palmarejo silver/gold mine in Mexico, today Coeur’s most important mine, producing 13 million ounces of silver equivalent in 2023. Coeur paid US$1.1 billion for the Palmarejo Project in 2007.

Mithril starts drilling its Copalquin Project in Mexico this week following up previous intersections, like 8 metres at 80 gpt gold and 704 gpt silver drilled in 2020. Copalquin has only had a modest 33,000 metres of modern exploration.

Nothing is more rewarding for shareholders that a significant discovery in a bull market. Mithril’s Copalquin Project has been admired by many geologists who have visited, including Colin Jones who has forty years experience as a mining, exploration and consulting geologist. Colin believes Mithril’s current 530,000 ounce gold equivalent resource will double with more drilling.

But what we really care about is Colin’s view that there is potentially another two or three targets at the ‘district scale’ Copalquin Property which could double or triple the endowment. 

In short, Mithril is ‘mid discovery’ and we expect high grade drill results and resource growth to reward shareholders handsomely. Look for Mithril to accelerate drilling at Copalquin on any success. 

A review of Mithril’s peers on the ASX and TSX illustrates Mithril is the both the highest grade and under valued on a per ounce comparison. We think Mithril will grow its resources of silver and gold my 5-6 times over the next two years implying a 10-20 times shareholder return from current levels.

These three companies, Coeur Mining, Discovery Silver and Mithril Resources, are my favorite three ‘silver eggs’. They represent three different stages of a mining companies lifecycle across production, development and discovery. Each company as the potential to reward shareholders with returns many multiples of current share prices as the greatest precious metal bull market of all time accelerates in the coming months.

Guest post: Simon is a director of Arlington Group Asset Management Limited. He has over three decades of investment banking and capital markets experience between Canada, the UK and Australia.

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The Oregon Group is an investment research team focused on critical minerals, mining, energy and geopolitics.

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