By Jack Barnes
If you're looking for a way to play the rise in silver without having to take on the risk of futures positions, Endeavour Silver Corp. (NYSE:EXK) should be at the top of your list of potential investments. Founded in 1981, Endeavour Silver is based out of Vancouver, Canada. The company has more than 750 full-time employees, with production of gold and silver in Mexico. It has a market cap of about $700 million, with an enterprise value of $574 million, once net debt and cash is accounted for.
On March 22, Endeavour released its annual results for 2010; to say that the company hit the ball out of the park would be an understatement. The company reported record earnings, cash flow, and revenue in 2010. While these are all great data points, and ones we would expect to see in a bullish commodity market, the little details are what really piqued my interest.
For its 2010 fiscal year, Endeavour Silver Corp reported:
- Operating cash flow jumped 167%.
- Revenue increased by 70%.
- Realized silver prices rose 27% to $19.62 per ounce sold.
- Silver production increased 26%.
- A silver production forecast of 3.7 million ounces in 2011.
- And a revenue forecast of $113.9 million.
"We remain focused on the continuous expansion and improvement of our two operating mines, the organic growth of our reserves and resources, and last but not least, we continue to seek opportunities to grow through mergers and acquisitions that are accretive to our shareholders," said Endeavour Chairman and CEO Bradford J. Cooke. "2011 promises to be another great year for Endeavour Silver."
I love a company that is executing ahead of its peer pack -- but that's not all. When I was a portfolio manager, I was continuously on the lookout for a company exhibiting what I call "M.O.G." or Massive Organic Growth. M.O.G is that magic sweet spot in a company lifecycle where you believe the investment is growing its assets quicker internally than what you believe the market is valuing it at. And that's what we're talking about with Endeavour.
Endeavour is forecasting its seventh year of organic growth, with a major expansion of its milling capacity. This is exactly the type of action necessary to keep driving additional production increases, while possibly lowering cost per ounce.
If silver prices continue to average over $30 per ounce, the company is looking at a profit margin of over $24 per ounce. I love it when I can buy shrinking costs, growing production, and zero debt.
Endeavour Silver has more than $100 million in working capital, no debt, with a falling cost to produce the next ounce at margin. This is where you get massive organic growth, and this is where we want to be investing our money in silver.
Endeavour Silver is one of those rare investments where everything is lined up for a continued blue-sky breakout over the longer term. The company's stock has traded between a low of $3.07 on July 7, 2010, to a 52-week high of $10.33 on March 7. The stock currently is trading in the mid-$9 range, and should be considered a "Buy" at these prices based on its M.O.G. profile.
There are very few companies that are generating historic results based on a commodity price 30% to 50% cheaper than it is currently trading at. This gives us a higher level of risk tolerance in the fundamentals of the company. The company ended 2010 in the best shape it's ever been in. Endeavour Silver is a buy at these prices.
Let's use a limit order to put in an order for 50% of the EXK we want, with a GTC limit order at around $8.75 and another low-ball stink order in the $7.25 range. The stock has been on a sustained move up over the last few months. I believe it could experience a short-term drop in prices, as people look to book their quick profits.
This kind of weakness is the type of market action we want to use to open our position in the stock. The Massive Organic Growth period is still developing; let's look to ride those fundamental growth aspects in the stock in the coming months.