Endeavour, First Majestic And Scorpio: Q3 Production Numbers Bode Well For The Sector

Includes: AG, EXK, USAPF
by: David Urban

Three mid-tier silver producers reported third quarter production numbers which bodes well for the sector as earnings season approaches.

1. Endeavour Silver (NYSE:EXK) – Silver production jumped by 8% to 858,738 ounces while gold production jumped by 7% to 4,926 ounces from a year ago.

Revenues skyrocketed by 93% to $38.8 million on a realized silver price of $40.72 per ounce and $1,679 per gold ounce.

The plant expansion at Guanajuato has been completed on time and on budget. A temporary gen-set is being used until a new electrical substation completed in the second quarter of 2012.

Production is already at 1,100 tpd while mine development continues.

Endeavour signed an option to buy the Lomas Bayas silver-gold property in the Copiapo region of Chile. The option requires Endeavour to pay $2.5 million dollars and $10-15 per gold ounce (with silver as the only by-product) from an independently delivered 43-101 within 24 months.

The Lomas Bayas property had suffered from a fragmented ownership structure which impeded efforts to launch a proper drilling program with today’s technology. A 50 hole, 10,000 meter drilling program has started on the property.

2. First Majestic Silver (NYSE:AG) – Silver production slipped by 5% to 1.75 million ounces from a year ago, but 1.89 million pounds of lead and 409 ounces of gold were produced, increases of 52% and 27%, respectively.

The new 1,000 tpd La Parrilla plant began operations in early September and has been deemed commercial as of October 1 with a new 115,000 kw power line expected to be completed by the end of October.

The La Encantada mine experienced an increase in Manganese which affected recoveries, but a plan is in place which will rectify this hiccup. The key takeaway is that silver recoveries will significantly increase once the work is complete, adding significant value to the mine.

Eighty percent of the mine equipment at Del Toro has been ordered and is expected to begin arriving on site during the first quarter of 2012.

3. Scorpio Mining (SNMPF.PK) – Throughput increased by 19% in the third quarter with silver production rising to 308,211 ounces. By-product production was also strong with zinc, copper, and lead production all rising by anywhere from 11-20%. For the full year, silver and zinc will meet forecasts while copper and lead will come in below forecasts.

Mining equipment will be upgraded in the next year which should increase efficiency and allow for greater throughput.

The current plant expansion at Nuestra Senora will be completed next year, taking capacity from 1,500 tpd to 2,250 tpd. This expansion will be completed by the middle of next year and completely funded using internal cash with no dilution of shareholder capital.

Despite the collapse in the price of silver, mining companies are reporting solid production numbers for the third quarter. Endeavour’s South American expansion continues with the Lomas Bayas property as it expands its asset base outside of Mexico.

The market came down hard on First Majestic, but at the present levels it holds tremendous value. You are looking at a company which will see recoveries increase at La Parilla and will open the Del Toro mine next year.

Scorpio is a small producer showing strong growth and the addition of new equipment and plant expansion will help increase production next year. While the stock prices have fallen and the silver price pulled back significantly from its highs earlier this year, we have entered into a seasonally strong period for mining shares and silver overall.

If the problems in Europe continue unresolved and the Federal Reserve decides to begin QE3 over the next few months, look for silver and silver mining stocks to take back off again and these three stocks will lead the way.

Sources: Endeavour Silver, First Majestic, and Scorpio Mining websites.

Disclosure: I am long EXK, AG, SMNPF.PK.