Endeavour Silver (NYSE:EXK) is about to get crushed. This is a name that I recommended profit taking on last spring but is a name that I have wrestled with for some time, but have maintained a buy rating on pullbacks. The stock, along with many in the sector experienced a meteoric rise in 2016. 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. Still, there are concerns over performance and the stock is about to implode today on the back of the just reported Q4.
In this column will discuss the production and finances, as well as the outlook for the name to shed light on why the stock is getting smashed. Metals have retracted a bit at the end of 2016 and into 2017. Now, I had no real expectations for output, and truthfully the production numbers disappointed me because they came in below the company's planned production. Endeavour churned out silver production that was down year over year at 1,088,845 million ounces for Q4 2016. That, of course, is a 37% decline from last year. While this was planned, it is still an 'ouch' moment. Gold production came in at 11,402 ounces, a whopping 26% decrease year over year. Using a 75:1 ratio for silver to gold, it is important to note that for the quarter, silver equivalent production was 1.9 million ounces. Of course, this is down from last year in line with guidance. Metals sold were down heavily as well, with just 946,546 ounces of silver and 11,004 ounces of gold sold, dropping 44% and 28%, respectively.
As you can imagine with the production cuts and fewer ounces being sold, there was obvious pressure on earnings, although the company delivered a beat versus expectations. Factoring in sales, revenue was down 32% year-over-year to $28.7 million. Thankfully realized silver prices were up 14% to $17.03 per ounce while gold prices were up 3% to $1,139 per ounce sold. Now, it is also worth noting that cash costs were $9.39 per ounce. But folks. costs were $5.27 per silver ounce just last quarter while all-in sustaining costs were $11.47. Bad news. All-in sustaining costs increased 16% to $20.11 per ounce. Taking into account the expenses, net loss was $5.2 million or $0.04 per share. The turn-around the company experienced seems to have fallen flat. What happened? Speaking on the quarter, CEO Bradford Cooke stated:
"Looking back, 2016 was a year of transition for Endeavour Silver. We delivered sharply improved financial performance in 2016 primarily due to higher metal prices and lower operating costs, notwithstanding lower cash flow and revenue resulting from lower production. We readily met our cost guidance, and with the exception of a slight (1%) miss on silver production, we met our production guidance which was revised upwards in July last year. Production was down year on year due to our decisions in January to significantly reduce spending on exploration and development in 2016 at low metal prices, which reduced our mine access and therefore metal production. We reversed that decision at the end of the second quarter and restarted our exploration and development programs to once again expand resources and access reserves. With the acquisition last year of two high grade silver-gold development projects in the historic silver mining districts of Zacatecas and Parral, Mexico and the advancement of our exciting new discovery on the Terronera property, our focus has now turned to near term growth. That makes 2017 a year of transformation for Endeavour as the company is now in a position to potentially build three new mines over the next three years to fuel Endeavour's next phase of organic growth."
So the planned production cuts were somewhat decided against but production still suffered. With metal prices retracing a bit in Q4, there was pressure on revenues. The cost data was a strong concern as well and that has investors on the Street selling shares at a high clip. Right now this name is to be avoided until his major sell off passes and we reassess. The good news is that the company has acquired more development projects for the long-term, but 2017 is going to be shaky. Of course, should gold and silver move significantly one way or the other, then the stock is going to move in tandem.
Note from the author: Quad 7 Capital has been a leading contributor with Seeking Alpha since early 2012. If you like the material and want to see more, scroll to the top of the article and hit "follow." Quad 7 Capital 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 "Get email alerts" 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.