A rare precious metal of exceptional qualities. Also called 'true-silver' or 'Moria-silver' it was discovered by the Dwarves of Durin's folk in Khazad-dûm, the only place in Middle-earth, to find it. It’s name is a Sindarin compound noun; mith + rill. It means something like 'mist-glitter'. Mithril was as beautiful as silver, as tough as steel, and never tarnished.

In the Second Age, when the Noldor heard of the discovery their smiths moved to Eregion, to the west of the mines.

The dwarves prospered, because mithril was almost priceless. But, as they dug deeper and deeper for more mithril, they awoke a Balrog, which had taken refuge there at the end of the First Age. They named it Durin's Bane, for its fury brought the downfall of the kingdom, and earned their halls the name of Moria, ‘The Black Pit’.

Some very important pieces of Middle-earth history were made of mithril:

The symbol of Kingship worn by Elendil and Isildur was a diamond bound to the forehead with mithril. Nenya, the Ring of Adamant kept by Galadriel was of mithril and diamond, and the crown on the standard Arwen made for Aragorn was embroidered with mithril thread.

Most famously the mail-shirt (pictured) given to Bilbo by Thorin Oakenshield was wrought of mithril rings. Later, when Frodo wore it on his quest, it saved his life more than once.
Encyclopedia entry originally written by Hathaldir