Endeavour Silver's Q2 Should Be Only A Prelude To A Much Better Q3

About: Endeavour Silver Corp. (EXK)
by: Peter Arendas

Endeavour Silver experienced another quarter of declining production and growing costs.

The 2019 guidance experienced a downward revision. However, H2 2019 should be better compared to H1, with a quarterly production of 2.05 million toz of silver equivalent on average.

The AISC should decline to $15-16/toz silver (assuming a gold price of $1,275/toz). However, at the current gold price of $1,500/toz, it should be up to $2 lower.

The Terronera mine is fully permitted now, with an updated PFS expected by the end of Q3 and a financing package probably sometime in Q4.

Endeavour Silver (EXK) released its Q2 2019 financial results that confirm that the company is in trouble. It was unable to tackle the high production costs. As I wrote in a previous article, the Terronera mine is highly needed to save the company. However, the recently improved metals prices, as well as the fact that Endeavour is almost debt-free, should provide enough time for Terronera to be developed.

In Q2 2019, Endeavour Silver produced 1,059,322 toz silver and 9,558 toz gold, or 1,823,962 toz of silver equivalent. The Q2 production volume is 2.8% lower compared to Q1 and 25.5% lower compared to the same period of last year. The production decline was caused by the El Cubo mine that is approaching the end of its current mine life, and the Bolanitos mine, where higher arsenic levels forced Endeavour to re-sequence the mine plan, which resulted in a lower production volume.

Although company management believes that production volumes will be higher in H2, it made a downward revision of the 2019 production guidance. It is expected that the overall 2019 production will equal 4.2-4.7 million toz silver and 39,500-44,000 toz gold, or 7.4-8.2 million toz of silver equivalent. As 3,699,717 toz of silver equivalent was produced in H1 2019, approximately 4.1 million toz of silver equivalent should be produced in H2 2019 (using the middle of the guidance interval). It equals to 2.05 million toz of silver equivalent per quarter on average.

(Source: Author's own processing, using data of Endeavour Silver)

Another negative outcome of Q2 is a further increase in production costs. The cash costs increased by 8.9% to $13.67/toz silver, and AISC grew by 7.9% to $20.9 quarter over quarter. Not only was Endeavour unable to cut the costs, but the costs experienced notable growth. When compared to Q2 2018, the cash costs increased almost by 80% and the AISC increased by slightly less than 21%. The good news is that as the production is expected to increase in H2, the costs should decline. In H2, the cash costs should average $8-9/toz silver and the AISC should average $15-16/toz silver. However, these estimates are valid for a gold price of $1,275/toz gold. At the current gold price of approximately $1,500/toz, the H2 gold credits should be higher by $4.98 million, or almost by $2.15/toz silver, which could push the cash costs down to $6-7/toz silver and AISC to $13-14/toz silver (also, this calculation uses the middle of the guidance intervals). Given that the silver price is approximately $17/toz right now, the Q3 results should look much better compared to Q1 or Q2. There could be even chance to break the current streak of quarterly losses.

(Source: Author's own processing, using data of Endeavour Silver)

Although Endeavour's production and realized silver price declined, the volume of sold metals, as well as realized gold price, increased enough to compensate for it. As a result, the company's Q2 revenues of $29.4 million were slightly higher compared to Q1. However, there is a visible decline when compared to Q2 2018. Although operating cash flow improved in comparison to Q1, it remained in the red, though only slightly. It is also possible to conclude that Endeavour recorded its fifth consecutive quarter of a negative net income. This time, it recorded a net loss of $10.1 million, which means EPS of -$0.08.

(Source: Author's own processing, using data of Seeking Alpha and Endeavour Silver)

Despite the negative Q2 results, Endeavour was able to keep its cash position and indebtedness under control. The cash on hand increased slightly, to $23.1 million, and the volume of debt increased to $4.1 million. What is encouraging is that the net debt remains negative at -$19 million.

(Source: Author's own processing, using data of Seeking Alpha and Endeavour Silver)

Endeavour Silver recorded several important events during Q2. On April 1, it announced that the El Compas mine reached commercial production. The mine is expected to produce around 700,000 toz of silver equivalent this year. What is even more important, on June 18, the company received the final permits for its Terronera gold-silver mine. An updated PFS and completion of the financing package should follow over the coming months, followed by an 18-month construction period. After completed, Terronera should be able to produce around 5 million toz of silver equivalent per year, at an AISC of $8.35/toz of silver equivalent.

The company also released several interesting exploration results. For example at the Bolanitos, drill hole MG-10 intersected 3.5 meters grading 1,827 g/t of silver equivalent. And at the Guanacevi, drill hole UG-75 intersected 1 meter grading 2,409 g/t of silver equivalent and 3.9 meters grading 642 g/t of silver equivalent.

Although Endeavour Silver experienced a poor quarter, its share price did very well. The growing gold and silver prices helped to elevate Endeavour share price to the $2.8 level. It represents an almost 60% growth in less than a month. If the current gold and silver prices prevail and management's H2 2019 production and cost projections come true, Endeavour Silver's financial results should record a significant improvement. If the company is also able to deliver a positive updated Terronera mine PFS and secure a reasonable (if possible non-dilutive) financing package, the freshly born share price bull trend may continue.

What I like about Endeavour Silver's Q2:

  • The company was able to maintain a safe cash position and low indebtedness.
  • Terronera is fully permitted now.
  • Some of the drill results were really good.
  • Over the remainder of 2019, production should increase and costs should decrease significantly.

What I don't like about Endeavour Silver's Q2:

  • The production declined once again.
  • The production costs kept on growing.
  • The 2019 production guidance experienced a downward revision.

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.