Endeavour Silver (NYSE: EXK; TSX: EDR) is a mid-tier, primary silver producer that operates three underground, silver-gold mines in Mexico. Aside from being one of most leveraged mid-tier silver producers in terms of beta of its stock price relative to changes in the silver price, the company has a pipeline of high-quality development and exploration projects, which will both increase production rather significantly and lower companywide all-in sustaining costs (AISC) over the coming years. Having low AISC is key to both surviving and thriving in a bear market and while Endeavour Silver currently isn’t one of the lower cost producers this will change. The company has been able to reduce operating and all-in sustaining costs over the last 12+ months.
There were operational issues beginning 2018, and the company is currently in the process of turning things around two of its operations. It has completed the turnaround of what is currently its largest producing asset, with the other nearing completion.
The company, in 2019, also ceased production at what was its largest cash flow generator at $18/oz. silver at El Cubo as the mine became depleted. The company will need to engage in and execute successful reserve and resource expansion over the coming year(s) if it wants to bring the mine back online at some point. This was partially negated by a new mine build (although its much smaller) at El Compas. Now that silver has finally broken out, Endeavour is generating robust cash flow and will be able to engage in exploration at all of its properties to increase the life of its assets. As it completes its turnaround, its two core operations together with a rising silver price, the company will begin to generate increasing operating cash flow beginning in Q3, if not Q4. As precious metals prices continue to appreciate, it should propel the stock price higher. The most substantial catalyst to the company’s stock price is still two-three years out, that being the Terronera mind build as it will be a long-lived, low-cost asset as well as the largest producing asset in its portfolio.
Endeavour Silver was one of the go-to names in the last silver bull market along with First Majestic, Pan-American Silver, and Fortuna. Like most silver companies, Endeavour has had trouble generating positive cash flow during the lean years and even in recent years due to the average all-in cost of production being close to or above the spot price. Only the lowest cost producers have been generating any meaningful cash flow (i.e. Fortuna’s San Jose Mine, Fresnillo, Pan-American, Silvercorp et al.). Most importantly, for Endeavour’s future is that it has a pipeline of two quality projects, with at least one of which (Terronera) will be built prior to the end of this bull market.
Endeavour is led by a capable management team including CEO Brad Cooke. He built up the company to what it is today over the last 16 years and his executive team has almost 200 years of combined experience in the mining industry. I’ve visited it two core operations [Guanacevi & Bolanitos] twice over the years, both of which were well run. Guanacevi’s turnaround is now currently complete and Q3 results should show some good numbers. Bolanitos is still underperforming [as of the end 1H 2020] although this could change before year end. On-going exploration efforts at each of its mines have yielded encouraging drill results.
Guanacevi (Producing, Mexico): Acquired in 2004, Guanacevi has been its largest and highest-grade silver mine. The company went on to expand plant capacity 100% to 1.2ktpd. Endeavour Silver then discovered seven new orebodies, three of which have been mined out. While Q2 results were impacted by the mandated suspension of mining operations, cash costs and AISC remained only slightly above those levels from Q1. Q2 cash costs and AISC were $8.48/oz. Ag and $15/oz. Ag vs. Q1 2020 of $9.01/oz. and $14.61/oz. The mine also generated positive cash flow of $2.7m (mine-site) in Q2. Silver and gold grades were significantly higher relative to the comparable period in 2019, 26% and 69% higher at 304 g/t Ag and 1.05 g/t Au. With higher silver prices in Q3, the earnings report will be far more robust.
Endeavour Silver has transitioned to mining the new, higher-grade El Curso, Milache, and SCS orebodies. The Q1 and Q2 improvement at Guanacevi was the primary driver behind the approx. 44% fall in cash costs and 37% fall in AISC on a companywide basis. Even though AISC aren’t exactly low, with silver prices well above $22/oz., this will be the company’s primary cash flow generator for the time being until Terronera comes online or Endeavour makes an acquisition.
In Q1, 2020, Guanacevi produced 743k oz. Ag and 2.4k oz. Au. (almost 3m oz. of annualized silver production) with cash costs and AISC of $9.01/oz. and $14.61/oz. Q2 production numbers are less important due to fewer tons processed, more than negated by higher grades at least relative to Q2 2019 at 675k AgEq oz. Throughout could inch higher in the back half of the year relative to the 1H 2020, but even if not, this is a nice silver operation.
The Guanacevi turnaround is now complete, which began in early 2019. Since Q2 2019 grades have increased 56% and milled tons increased 26%. At Guanacevi, the company installed two refurbished crushers in April and ramping up throughout to 1.2ktpd in the 2H 2020. Furthermore, Endeavour is replacing mining contractors with employed to lower costs and at current metal prices, will begin to generate free cash flow.
Bolanitos (Producing, Mexico): What has been the company’s lowest cost operation for many years, is no longer the case but this could change depending on the success of the on-going turnaround and continued exploration results. Production has been below budget due to lower grades, throughput, and slower mine development to access new higher-grade orebodies. In Q2, despite grades 40% below the comparable period in 2019, the mine produced 256k oz., which is largely attributable to a 45% fall in tons processed (due to suspension of mining activities) and lower grades. Q2 cash costs were negative ($30.20/oz. Ag) but AISC was $29.79/oz. AISC did drop relative to Q1 2020, when it was $44.17/oz. The elevated AISC reflect increased sustaining capital (accelerated mine development). Bolanitos has been able to operate with AISC below $5/oz. Ag, due to material gold production.
The significant differential between cash costs and all-in sustaining costs also has to do with the investment in new mine equipment to improve fleet operating costs and equipment availability and increased mine development. Bolanitos is a smaller operation so even a marginal increase in sustaining capital (i.e. $2-$3m), greatly impacts AISC. Additionally, the company is looking to acquire extensions of known orebodies to increase mine life, similarly as was the case at Gaunacevi.
The improvements at Bolanitos should continue through the rest of the year and into the 1H 2021, the asset will likely see improved operations, which combined with higher silver and of course gold prices (1H 2020 gold production accounted for 78% of AgEq production), could see Bolanitos generating solid cash flow.
The development of new higher-grade orebodies [San Miguel and Melladito] needs another quarter, Q3, of mine development after the suspension period [which ended close to the end of Q2] to catch up. In other words, operations should see a nice improvement, at least vs. Q1/Q2 2020, in either Q3/Q4, if not 1H 2021. In 2019, the company made several improvements including; revised mine plan to reduce arsenic levels, the acquisition of new equipment to reduce operating costs, accelerated mine development to improve access to ore in 2020, discovered a new ore-body to be included in the 2020 mine plan, and improved mine and plant availability.
Endeavour will focus on ramping up throughput to 1.2ktpd in the 2H 2020, expanding production from San Miguel to 300tpd and developing the Melladito orebody. Sustaining capital could remain elevated as the company wants to develop new high-grade areas. In June 2020, the company saw rising quarterly throughput at 1,070tpd vs. 905tpd and 893tpd in Q1 2020 and Q4 2019.
El Compas (Producing, Mexico): The El Compas mine is Endeavour’s newest operation. The operation is a small but high grade, permitted gold-silver mine with a small leased flotation plant in the historic silver mining district of Zacatecas.
Q1 was rather close to plan (as Q2 was impacted as seen through a 53% fall in tons produced vs. Q2 2019). Recovery rates of both metals, gold and silver, were lower than projected, though grades did improve relative to Q1 2020. The development of the higher grade Upper El Compas vein was delayed in Q1, which will push the mining of the Upper El Compas vein back. While El Compas only produced 130k AgEq oz., the cost per ounce of silver produced was exceptionally low, with cash costs and AISC of negative ($96.83/oz.) and ($48.25/oz.). Unfortunately, silver only accounted for 13% of 1H 2020 production. In turn, free cash flow generation (mine-site) was $1.1m in Q2. Of course, this was with a historically high gold-to-silver ratio (GSR), so expect silver to account for 20% +/- of total production over the near-to-medium term as the GSR went over 120:1 at one point in Q2, and is currently trading between 70-80:1. Over the near and medium term (1-3yrs), the GSR should continue to fall over time.
The company is developing the Upper El Compas to access higher grades. The company is also transitioning from cut & fill to long-hole mining to reduce costs as well as transitioning from mining contractor to employees, also to reduce costs. The company has a new discovery in the MNFW vein at Calicanto and is exploring the Calicanto property to identify new orebodies.
Terronera (Development, Mexico): The Terronera project is located in Jalisco State and was acquired in 2011. This asset, when in production, will be Endeavour’s cornerstone asset. It will almost double companywide production (and would do so if expanded to 2ktpd) and greatly reduce the cost profile of the company. It also has district scale potential on its 17,369 hectares. This covers the entire district of San Sebastian, which has 50+ old mines one 50+ known veins. With the release of an impressive updated PFS, the feasibility study (FS) is underway, upon which a construction decision will be made. The following outlines some of the 2020 PFS highlights:
- Initial mine life: 10-years
- Avg. Ag and Au grades: 201 g/t & 2.29 g/t
- Average annual production: 3m oz. Ag & 33k oz. Au [5.9k AgEq oz.]
- Cash Costs and AISC of negative ($4.15/oz.) and ($2.06/oz.): assuming silver and gold prices of $18.49 and $1,812/oz. The higher the price of gold, the lower the cost as gold is a by-product credit. For example, the base case scenario, which uses a silver and gold price deck of $15.97/oz. and $1,419/oz. would see cash costs and AISC of $0/oz. and $2.10/oz., or a $4/oz. swing in AISC.
- Using long-term price decks of $18.49/oz. Ag and $1,812/oz. Au yields an NPV5 of $229m.
- Using long-term price decks of $24/oz. Ag and $1,950/oz. Au yields an NPV5 of approx. $335m.
- Initial Capital Investment: $99m
- Feasibility study will look at a large plant size, which would increase production and improve economics as well as other upside opportunities. It is expected to be completed within the next 12 months.
There are plenty of upside opportunities, the biggest of which could be an expanded plant to 2ktpd [subject to increasing reserves]. The company will also look to expand the size of the property by acquiring new concessions covering the mineralized areas. Other upside opportunities include: resource conversion [inferred to probable] and test other veins. Endeavour will also look at optimizing mining methods with more geotechnical drilling, additional long-hole mining may be possible, optimizing ore transport, mining equipment, and recoveries.
The main Terronera and La Luz vein orebodies are both open to a degree at surface and at depth. Endeavour is targeting three main areas with significant potential to increase resources; the deep central area, the central-north part and the shallow part of the Santa Gertrudis-El Hundido area. The La Loma-Los Pajaros veins, located close to the footwall of the Terronera vein have returned economic grades over sizeable widths from rock chip sample but they have not been drilled. These vein targets range from up to 500m long by up to 3m thick. Given the exploration success at Terronera, it is no stretch to assume Endeavour will increase the plant size to 2ktpd, from 1.6ktpd as proposed in the 2020 PFS. Alternatively, should the price of silver and gold continue to rise, Endeavour could undertake higher throughput regardless, to maximize NPV.
The current timeline is as follows: Endeavour will undertake a feasibility study, which is expected to take approx. 9-12 months. Based upon this report, the company will make a construction decision. Construction will take approx. 18-months from the start to first production. In other words, barring any setbacks, Terronera should come online in the 1H 2023.
Parral (Exploration/Development, Mexico): This is a potential future core asset. Prior to 1990, it was producing 4m oz. Ag p.a. Currently, Parral has indicated and inferred resource estimates of 3.7m oz. Ag and 36.8m oz. Ag + 21.8k oz. Au. Its land package covers 3,450 hectares. Endeavour will likely begin to fast track the project once silver prices have remained elevated for a more pro-longed period of time and undertakes additional exploration.
Over the past 2 years, Endeavour was faced with operational issues that have been rectified through an extensive turn-around program which is now yielding positive results. The company has also built and commissioned a new mine, advanced a high-priority greenfield project and acquired another, which will form the new Endeavour over the coming 5 or so years. Endeavour is also looking to acquire additional assets to replace the production gap from El Cubo and has a track record acquiring assets at low prices. During the lean years, most primary silver companies couldn’t afford to engage is any meaningful exploration efforts, as they were just trying to keep the lights on and diluting existing shareholders. Due to the severe bear bull market, Endeavour Silver has had to dilute shareholders to a degree and it recently completed an equity issuance. Free cash flow generation and debt financing (it currently has no existing debt) should allow the company to build Terronera without having to issue any more shares.
At current prices [$25/oz. Ag + $1,950/oz. Au]. the after tax NPV of Terronera is $350 million and the IRR is 65% with a payback period of approximately 1 year. The NAV of Terronera alone accounts for more than 60% of Endeavour Silver’s market capitalization (at the time of this writing; $655m). In other words, Endeavour is a highly leveraged play on silver and gold given its combination of higher cost assets and low-cost assets.
Endeavour Silver is a high-growth mid-tier silver producer, which provides excellent leverage to changes in the silver price and run by a very capable management.
Disclosure: I hold no positions in the stock of the company discussed above.
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