Peak Gold & Silver: Shortages Ahead | Shawn Khunkhun

Key Concepts

• Peak Gold & Silver Production: Global gold and silver production has plateaued despite increasing demand.
• Dolly Varden Silver: A Canadian-based silver exploration and development company focused on high-grade silver deposits in British Columbia’s Golden Triangle.
• Contango Ore: A US-based gold producer operating the Mcho mine in Alaska, with additional gold projects (Lucky Shot, Johnson Track).
• Merger of Peers: Dolly Varden Silver and Contango Ore are merging to create a diversified precious metals producer.
• Direct Shipping of Ore (DSO): A low-capex mining method where high-grade ore is shipped directly to a processing facility (Kinross’s Fort Knox).
• Hedging: Contango Ore previously hedged a portion of its gold production; the company is actively reducing its hedge position.
• Land Curve: The historical timeline of a mining project, now significantly extended due to permitting and social challenges.
• Market Valuation Lag: Mining company valuations often lag behind increases in precious metal prices.

Production Decline & Rising Demand

The interview begins by establishing a fundamental market dynamic: global gold and silver production has peaked. Despite increasing demand driven by factors like debt levels and a potential return to sound money principles, the largest gold companies are not increasing output. This supply-demand imbalance is a key driver for higher precious metal prices. Sean Kungkun notes that production is declining while demand is rising, creating a favorable environment for miners.

Dolly Varden & Contango Merger – A New Entity

The core of the discussion revolves around the merger between Dolly Varden Silver and Contango Ore. Dolly Varden, located in British Columbia’s Golden Triangle, currently holds an estimated 64 million ounces of silver and 1 million ounces of gold (with a revised estimate of up to 100 million ounces of silver and 1 million ounces of gold expected in April/May). The company has been consolidating five past-producing high-grade silver mines.

Contango Ore, operating the Mcho mine in Alaska, generated $102 million in free cash flow in the past year and is projected to increase production to 100,000 ounces of gold annually with the addition of the Lucky Shot project by 2028, potentially reaching 200,000 ounces by 2029/2030 with the Johnson Track project.

The merger aims to create a diversified precious metals producer with a strong financial foundation. Following a recent $50 million financing (with $40 million+ from existing cornerstone investors), the combined entity will have approximately $100 million in cash and $100 million in cash flow, with minimal debt (under $15 million).

Drill Program Results & Homestake Deposit

Recent drill program results from Dolly Varden’s Homestake deposit demonstrate the deposit’s continuity and expansion potential. Drilling yielded over 40 meters of almost 5 grams per ton of gold, indicating a robust and growing resource. This reinforces the value of Dolly Varden’s asset base.

Unhedging & Market Impact

Contango Ore has been actively reducing its gold hedging position. They recently eliminated 15,000 ounces of hedged production, reducing their total hedge to 26,000 ounces, with a goal of being fully unhedged by mid-year. This is a significant move, as hedging limits exposure to rising gold prices. Kungkun believes that being unhedged will allow the company to fully benefit from potential price increases, potentially reaching a point where they are celebrating a $5,000 gold price. He views this as a “game changer” for the company’s valuation.

The Land Curve & DSO Mining

Kungkun discusses the “Land Curve,” a concept describing the extended timeline for bringing new mines into production. Historically, this process took 2-3 years; now, it can take 7-20 years due to permitting challenges and social considerations.

To mitigate these challenges, Dolly Varden is employing a Direct Shipping of Ore (DSO) strategy. This involves shipping high-grade ore directly to Kinross’s Fort Knox processing facility in Alaska, bypassing the need for building a dedicated processing plant and navigating lengthy permitting processes. This approach is particularly effective for high-grade deposits and offers a low-capex, rapid production pathway. The use of covered shipping containers ensures environmental safety.

Market Valuation & The “Time Machine” Opportunity

Kungkun highlights a disconnect between precious metal prices and mining company valuations. The stock market typically looks six months ahead, while the resource sector often lags, basing valuations on trailing prices. He argues that the recent surge in silver and gold prices has not yet been fully reflected in miner valuations, creating a “time machine” opportunity for investors. He suggests that investors can benefit by investing in miners before the market fully recognizes the impact of higher metal prices. He draws a parallel to Andy Schectman’s ability to anticipate market trends.

Jurisdiction & Kinross Partnership

The importance of operating in safe and stable jurisdictions is emphasized. Dolly Varden’s projects are located in British Columbia, Canada, and Alaska, USA. The partnership with Kinross, a major global gold producer, provides operational stability and reduces risk. Kinross’s Fort Knox facility provides a reliable processing solution for Dolly Varden’s ore.

Key Quotes

• Sean Kungkun: “We’re on pace to be unhedged by the middle of the year. And that is going to be I think um a step change for the company.”
• Sean Kungkun: “The market like the stock market traditionally looks six months ahead… In the resource sector we do things a little bit differently. We’re looking at three-year trailing prices.”
• Sean Kungkun: “The time machine opportunity you have is to buy the miners who haven’t quite moved yet.”

Technical Terms

• 43-101 Compliant Estimate: A resource estimate prepared in accordance with National Instrument 43-101, a Canadian standard for reporting mineral resources.
• DSO (Direct Shipping of Ore): A mining method where ore is shipped directly to a processing facility without on-site crushing or grinding.
• Hedging: A strategy used to reduce financial risk by taking offsetting positions in related assets.
• Free Cash Flow: The cash a company generates after accounting for capital expenditures.
• Capex (Capital Expenditure): Funds used by a company to acquire, upgrade, and maintain physical assets.
• In-Situ: Meaning "in place" - referring to the value of minerals still in the ground.
• Homestake Deposit: A gold-rich deposit within Dolly Varden’s property.
• Mcho Mine: Contango Ore’s operating gold mine in Alaska.
• Lucky Shot & Johnson Track: Contango Ore’s development-stage gold projects.

Logical Connections

The interview progresses logically from establishing the broader market context (peak production, rising demand) to detailing the specifics of the Dolly Varden/Contango merger. The discussion then delves into the technical aspects of the projects (drill results, DSO mining) and concludes with a market outlook and investment opportunity. The unhedging strategy is presented as a key catalyst for future value creation, directly linked to the anticipated rise in gold prices.

Conclusion

The interview presents a compelling case for investing in Dolly Varden Silver (soon to be part of the merged entity with Contango Ore). The company is strategically positioned to benefit from the increasing demand for precious metals, with a focus on high-grade silver and gold deposits in safe jurisdictions. The merger with Contango Ore provides a strong financial foundation and operational expertise, while the DSO mining strategy offers a rapid and low-cost path to production. The unhedging of Contango’s gold production positions the company to fully capitalize on rising gold prices, creating a significant value opportunity for investors who recognize the current disconnect between metal prices and miner valuations. The overall message is that the time to invest in precious metal miners is now, before the market fully catches up to the fundamental strength of the sector.