In this article, I'll discuss Endeavour Silver's (NYSE:EXK) outlook now that silver prices have had a rough couple of months. I'll write a brief introduction on the company, and then move over to its production profile where I'll provide a sensitivity analysis to see how big the influence of changing silver prices is on its operational cash flow. This will lead to a conclusion wherein I'll explain my reasons why (not) to invest in Endeavour Silver.
Endeavour Silver is currently producing silver from three mines in Mexico, as well as a considerable amount of gold as a byproduct. In 2012, total production came in at 4.5M oz. of silver and almost 39k oz. of gold, for a total revenue of $208M. After acquiring the El Cubo mine from AuRico (NYSE:AUQ) last year, the company expects to increase its production to 5-5.3M ounces of silver and between 46k and 49k ounces of gold, which would be a very nice increase from the 2012 numbers.
This article is meant to investigate whether or not Endeavour Silver might be a good investment now that gold and silver prices have gone down the drain.
Endeavour's Production Profile
As I said above, Endeavour Silver operates three mines in Mexico, and the combined average cash cost per ounce of silver for this year would be between $9 and $10/oz. However, I expect this number to increase. As the price of gold is currently $400/oz. lower than when the company provided guidance, I think the revised cash cost will be considerably higher and will eventually be in the region of $13-$14/oz.
There are huge differences between the company's three mines if we look at the Q1 production and cash cost results, as shown in the table below:
Cash cost/oz of silver
It's very clear there is a big difference between the three projects. While Bolanitos is a very high-margin silver mine with a negative cash cost in Q1, Guanacevi and El Cubo have considerably higher cash costs per ounce of silver and aren't making a lot of money right now. The cash cost at El Cubo should decrease as the company is currently increasing the production rate, so the fixed costs will be spread out over more produced ounces. I expect El Cubo to have a cash cost of approximately $12/oz. by year-end.
Guanacevi is another story, and I think Endeavour Silver might very well put the mine on care and maintenance if the price of silver doesn't improve soon. It doesn't make any sense to produce 2.5M oz. of silver at zero profit, and it would be a better strategy to mothball the mine until the silver prices improve. This would preserve the current reserves and resources that stand at approximately 45 million ounces (resulting in a life of mine of 13 years, based on a 80% recovery rate).
The Sensitivity to the Price of Silver
In the table below, I've made some back-of-the-envelope operational cash flow projections based on different silver prices. Keep in mind, these are the cash flows from mining operations, and do not include sustaining further exploration work and general and administrative expenses (which totaled $24.3M in 2012, or approximately $4.76 per ounce for 2013 if the 2012 level is maintained). Please note, these numbers are based on the official cash cost guidance of $9-$10/oz of silver, which I expect to be considerably higher.
Silver price ($/oz)
Annual cash flow (based on 5.1Moz per year
Annual cash flow per share (based on 100M shares)
As you can see, at the current share price, Endeavour Silver will only have a cash flow per share of approximately $0.45. This table makes it very clear that Endeavour Silver is extremely levered to silver prices. If the price increases 60% from the current levels, the company's cash flow per share would increase by a stunning 126%.
If the company is spending the same amount on sustaining capex, exploration and general and administrative expenses as last year, Endeavour Silver is currently not making any free cash flow. However, I expect the company to have cut its entire exploration program by now (which would be more than reducing the "non-core exploration program by 25%" as it announced earlier this year).
If silver prices stay below $20/oz. for an extended period of time, I expect Endeavour Silver to cease production at their Guanacevi mine, which would lead to a 50% reduction in the planned annual output. If silver drops below $15/oz., I'm afraid it will also have to halt production at the El Cubo mine. While this wouldn't be good news, I'm confident the company will be able to survive any turmoil, as the smaller Bolanitos mine would be able to generate enough cash flow to keep the company alive.
The situation doesn't look very optimistic for Endeavour Silver right now, but it's a great investment for people who believe in much stronger silver prices in the future. If silver goes back to $25/oz., Endeavour Silver is currently trading at just five times the expected operational cash flow, which isn't expensive at all. Endeavour silver provides any investor with a decent leverage on the price of silver and could easily double if silver bounces again soon.