Endeavor Silver (NYSE:EXK)
Endeavor Silver, which owns and operates three high-grade underground silver mines in Mexico, recently reported its fourth quarter and annual 2014 financial and operating results. As expected, lower silver and gold prices had a negative effect on the company's earnings and profitability.
For the fourth quarter, the company produced 2 million silver ounces and 15,127 gold ounces, for total silver equivalent production of 3.1 million ounces - good results. However, the company reported an adjusted loss of $11 million and a total net loss of $66.9 million ($.67 per share), mainly from an impairment charge of $83 million on its El Cubo mine. On the bright side, all-in sustaining costs were $15.37 per ounce of silver, which is much lower than the $20.18 cost per ounce recorded in the third quarter, which allowed the company to produce positive EBITDA of $7.7 million. So it wasn't a terrible quarter by any means.
Balance sheet strength is key here as silver prices continue to slump. Thankfully Endeavor's balance sheet isn't all that bad - the company has $31.04 million cash and equivalents, plus $19.7 million accounts receivable and $21.6 million in inventories, for total current assets of $75.8 million, compared to total current liabilities of $54.58 million, which includes a $29 million credit facility. So, the company's working capital position is a positive $21.3 million.
Still, I wouldn't recommend investing in shares right now. For 2015, the company has guided for silver equivalent production between 9 to 10 million ounces, with all-in sustaining costs expected to be in the $18 to $19 range, partially due to the $32.7 million the company plans to spend on capital projects.
With silver trading at $16 per ounce, this means Endeavor Silver could lose at least $15-$20 million in 2015, unless prices pick back up. So while the company has working capital of $21.3 million, this could quickly deteriorate if the company does not reduce costs further. That's why I think shares have further room to fall over the next few months, unless we see a fast rally in precious metals prices.
In my opinion, the best thing Endeavor Silver could do here is to merge with a nearby silver producer, Great Panther Silver (GPL). Endeavor owns and operates the Bolanitos mine, located 10 kilometres northwest of the city of Guanajuato in the state of Guanajuato, whileGreat Panther owns and operates the Guanajuato mine complex very close nearby. So I believe there could be cost savings that can be realized if the two miners were to join forces and integrate mining operations.
In addition, Great Panther has a solid balance sheet, with $18 million in cash and equivalents at the end of 2014, with no debt. Great Panther also expects all-in sustaining costs per silver ounce between $18.50 to $19.80 in 2015, which is similar to what Endeavor expects. Therefore, the combined company would have close to $50 million cash and equivalents and $39 million working capital to protect against low precious metals prices, while also potentially realizing cost savings at Guanajuato.
The bottom line is Endeavor Silver is not a buy here, unless the company can prove it can lower its all-in costs below $16-$17 per ounce. I continue to believe a merger with Great Panther, or perhaps another Mexican silver miner like First Majestic (AG), makes a lot of sense for shareholders, but management may feel otherwise.
