Endeavour Silver: Underpromising And Overdelivering

| About: Endeavour Silver (EXK)


Q2 production numbers are out.

I discuss the results and why guidance had to be revised.

The company is upping its planned investments heavily for 2016.

Watch for the financials that come out in a few weeks.

Endeavour Silver (NYSE:EXK) is a name that I have wrestled with for some time, but have maintained a buy rating on, even though back in May I thought you should be taking SOME profits, considering the meteoric rise the stock had experienced. That said, I was really surprised at first when the company decided to slash production entering 2016; however, upon further consideration, I concluded the long-term survival of the company took precedence and so saving cash was key. I still see promise in this name over the long haul as metal prices rebound. This is a stock that I think provides a levered play on both silver and gold. You saw that effect as metal prices moved up earlier this year. You can almost consider this name, along with many others in the sector, like an option buy on silver prices. I think most of the downside in silver has been recognized at this point, and a real rebound is underway. I have liked Endeavour because it is a low-cost miner with stable operations. That said, since the company has been cutting its output in accordance with its plan, I want to take a look at production numbers in Q2.

Production and a discussion of what is going on here is the purpose of today's column. Considering the rebound we have seen for metal prices, it is a slight shame that production is being cut. That said, I had no real expectations for output, and truthfully the production numbers impressed me because they surpassed the company's planned production. Endeavour churned out silver production that was down (expectedly) year-over-year at 1,551,851 million ounces for Q2 2016. That, of course, is a 14% decline from last year. It is interesting to note, though, that gold production came in at 15,649 ounces, a 17% increase year over year. Using a 70:1 ratio for silver-to-gold, it is important to note that for the quarter, silver equivalent production was 2.6 million ounces. Of course, this is down from last year in line with guidance. Gold sold was up 11% to 15,364 ounces was silver ounces sold were down 22% to 1,483,790 ounces.

So what is going on at the mine level? Well, at Guanacevi, 629,221 ounces of silver were produced along with just 1,365 ounces of gold. Throughput was a bit reduced here with 98,756 tons per day produced. At Bolanitos, silver production came in at 276,885 ounces, with gold production at 8,470 ounces. At El Cubo, mine expansion allowed more tons per day to be processed. Here, the company churned out 645,745 ounces of silver and 5,814 ounces of gold. Commenting on the production, CEO Brad Cooke stated:

"Having successfully minimized our all-in sustaining costs and boosted our free cash flows in recent quarters, management returned its attention to optimizing near-term production and long-term growth in Q2, 2016. Our production is well ahead of plan for the year and as a result, we revised our operating plan and raised our production guidance by about 13% for 2016. We augmented our management team with the recent appointment of Dale Mah as Vice President, Corporate Development and closed the acquisition of Oro Silver Resources Ltd. and its small but permitted, high-quality El Compasgold-silver mine in Zacatecas, Mexico. El Compas should boost our near-term production and cash flow while we develop the larger Terronera silver-gold mining project. At Terronera, mapping extended the vein system to cover an area of 7 km by 7 km, and our exploration group identified an additional nine veins on the northern half of the property. Grab, selected and chip sampling confirmed that high-grade, bonanza, low-sulfidation epithermal silver-gold mineralization is present in many of the newly identified veins, with assays up to 2,880 gpt silver and up to 26.7 gpt gold."

So the planned production cuts will continue to go forward, but given the strong results the company raised production guidance nearly 13% for 2016. It now sees 2016 production of 5.5 to 6.0 million ounces of silver and 49,000 to 54,000 ounces of gold being produced. The company also upped heavily its planned capital investment from $11.3 million to $17.4 million, which is heavily due to the need for capital to conduct additional mine development at Guanacevi. As we move through 2016 I will reiterate that the Terronera project is exciting and I will be following the progress here. The bottom line here is that while a lower oil price helps reduce costs, the decrease in production is the best way to contain costs. Financial results will be out in a few weeks, and I will be watching the cost of production, in addition to administrative expenses.

Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles, which are time-sensitive, actionable investing ideas. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.