We're nearing the finish line for the Q4 Earnings Season for the Silver Miners Index (SIL), and one of the most recent companies to report was Endeavour Silver (NYSE:EXK). The company had an outstanding year and beat its upwardly revised FY2021 output guidance, though this was partially overshadowed by inflationary pressures, which eroded expected margin gains. The good news is that Terronera should fix this and could double production by 2025. With one of the best growth profiles sector-wide, EXK is a name to keep an eye on, but at ~1.90x P/NAV, I see better bets elsewhere from a relative value standpoint.
Endeavour Silver ("Endeavour") released its Q4 and FY2021 results last week, reporting quarterly production of ~1.44 million ounces of silver and ~9,500 ounces of gold. This translated to the best quarter for silver production in years, more than offsetting the slight decline in gold production, which dipped 25% on a year-over-year basis. Given the strong finish to the year, Endeavour trounced its FY2021 guidance midpoint, which is even more impressive given that this was upwardly revised guidance. Let's take a closer look at the results below:
As shown in the chart above, Endeavour saw a massive improvement in production year-over-year, helped by the fact that it was lapping a temporary closure of operations related to COVID-19. However, while the company was up against easier comps, this was still a very solid year, and the main reason for the increased production was much higher grades at its Guanacevi Mine. In fact, Guanacevi's gold and silver grades were above plan according to the company, coming in at 370 grams per tonne silver and 1.09 grams per tonne gold last year.
Combined with 20% higher throughput, the operation produced 40% more silver-equivalent ounces [SEOs] on a year-over-year basis, with production soaring to ~5.4 million SEOs. The chart above clearly shows that grades at Guanacevi have been exceptional and continue to trend higher, with silver grades hitting a new high of 417 grams per tonne in Q4, while gold grades soared to 1.21 grams per tonne gold. This outstanding performance from Endeavour's flagship operation more than offset El Compas heading into care & maintenance, with contribution from just two assets in Q4 (Bolanitos & Guanacevi).
Moving over to Bolanitos, the company had a strong year here as well, with production up 32% to ~2.47 million SEOs. This was driven by higher silver grades and higher gold and silver recovery rates, but primarily due to a sharp increase in throughput to ~418,500 tonnes for the year. Like Guanacevi, the operation was up against relatively easy year-over-year comps due to the temporary shutdown, but this was still a solid year for the asset. The company noted that the improved recovery rates last year were due to improved ore blending.
Moving over to revenue, the headline number in Q4 likely disappointed investors, with revenue dropping 20% year-over-year despite the strong finish to 2021. However, this was due to the decision to withhold inventory, evidenced by Endeavour ending the year with ~1.03 million ounces of silver in inventory and over 1,000 ounces of gold. Besides, revenue came in at $165.3 million on a full-year basis despite the decision to withhold some sales due to depressed metals prices. This represented a 19% increase year-over-year, driven by higher gold and silver ounces sold combined with a higher average realized silver price ($25.22/oz vs. $21.60/oz).
Unfortunately, there was some negative news to report, and this was from a cost standpoint. While the cost increases were largely out of the company's control and were related to inflationary pressures (labor, fuel, consumables), cash costs rose to $9.31/oz in FY2021 and $8.65/oz in Q4 despite the 4% increase in SEO production (Q4 2021 vs. Q4 2020). This translated to a 27% increase in costs year-over-year. On an all-in sustaining cost [AISC] basis, costs rose 5% to $19.48/oz in Q4 and $20.34/oz in FY2021, up 5% and 16%, respectively.
The increase in AISC was the most significant at Guanacevi, where costs rose 14% to $19.46/oz in FY2021. This was related to higher cash costs due to inflationary pressures and higher royalties/third-party ore purchases. Combined with increased capital expenditures related to mine development and increased exploration expenditures, AISC was up sharply despite what should have been lower costs due to the significant increase in production. At Bolanitos, cost increases were less significant, up just 7% year-over-year, but AISC came in at $25.14/oz, right in line with the company's average realized silver price for the year ($25.22/oz).
Given the increased costs, Endeavour did not see the increase in margins that some investors might have expected, with AISC margins coming in at just $4.88/oz in FY2021, up from $4.01/oz in FY2020. The higher average realized silver price was solely to thank for this increase in margins, given that AISC was up 16% year-over-year. Fortunately, the company did manage to report an increase in mine operating cash flow ($61.9 million vs. $56.2 million) and earnings per share ($0.08 vs. $0.01) despite the inflationary pressures.
Looking ahead to FY2022, it's looking like it will be a much softer year for the company, unless the company is gearing up for a massive beat as it accomplished in FY2021. This is based on the fact that the guidance midpoint is sitting at ~7.15 million ounces at all-in sustaining costs of $20.50/oz, which would translate to a 13% decline in annual production at similar costs. The good news is Endeavour should be more insulated than peers due to operating a high-grade underground mine at Guanacevi from a fuel standpoint (assuming fuel prices remain elevated).
The other good news is that the silver price appears to have a strong bid under it thus far this year and has a good chance at coming in above $25.00/oz in FY2022. So, once Endeavour is past H2 2022, it should be up against easier year-over-year comps. Having said that, Endeavour already has some of the highest costs industry-wide. Hence, if the silver price does retreat below $23.00/oz, Endeavour's margins will be razor-thin this year.
While the cost increases are certainly a disappointment, it's worth noting that Endeavour has a very impressive development project in the wings, and Terronera could be transformative for the company. This is because the project is projected to produce ~6 million SEOs per annum, which is just shy of Endeavour's current consolidated production profile, at all-in sustaining costs below $4.00/oz. Even if we see cost creep and costs come in closer to $5.00/oz, this would still be one of the lowest-cost silver miners globally and shave several dollars off Endeavour's consolidated costs beginning in 2025.
It's also worth noting that while we could see some cost creep from a capex standpoint at Terronera, the company did purchase its mobile fleet, which should help to offset some of the inflationary pressures if no long-lead items had been ordered yet. Based on the current timeline, Endeavour hopes to make a construction decision later this year on Terronera, with the possibility that this asset could be in commercial production by later 2024 assuming a conservative timeline. Let's take a look at Endeavour's valuation below to see if the stock is a Buy.
Based on a current share price of $5.03 and with an updated fully diluted share count of ~187 million shares, Endeavour has a market cap of ~$941 million. This translates to a P/NAV of roughly 1.9x after adjusting for estimated corporate G&A of $60 million, net cash of ~$100 million, and project NPV of ~$470 million. This estimate includes Pitarilla, which I've valued at $100 million to be conservative, given that we don't yet have an updated study showcasing Endeavour's plan for the project and updated project economics.
I would argue that this is a steep valuation for a small-cap precious metals name that operates out of mostly Tier-2 jurisdictions. This is because there are other precious metals names with attractive growth profiles like Alamos Gold (AGI) that trade at less than 1.0x P/NAV. This is despite less exposure to Tier-2 jurisdictions, a more attractive margin profile, and a track record of share repurchases, not steady share dilution. Obviously, silver producers deserve some premium given that silver outperforms gold in bull markets, but a premium of this magnitude is hard to justify.
Moving over to the technical picture, the recent rally in the stock has left EXK in the top half of its expected trading range, with strong support at $3.82 and resistance at $5.90. This points to a current reward/risk ratio of 0.73 to 1.0, which is nowhere near my criteria of 5 to 1.0 reward/risk when buying small-cap sector laggards. The unfavorable reward/risk ratio doesn't mean that Endeavour Silver can't go higher, and a persistent bid in silver prices could certainly push the stock towards resistance at $5.90. However, with a steep valuation on a relative basis and an unfavorable reward/risk, I believe there are much more attractive opportunities elsewhere.
For investors looking for leverage to the silver price, Endeavour Silver is one of the go-to names, and the company certainly checks the boxes from a growth standpoint. However, it's harder to justify owning the stock from a value standpoint, and I have less interest in owning sector laggards unless I'm getting a very attractive price. In summary, I continue to favor owning more attractive businesses at better prices, and my preferred names to buy this dip would be Alamos Gold and Nomad Royalty (NSR), not Endeavour Silver.
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Disclosure: I/we have a beneficial long position in the shares of AGI, NSR either through stock ownership, options, or other derivatives. 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.
Additional disclosure: Disclaimer: Taylor Dart is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Taylor Dart expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing. Given the volatility in the precious metals sector, position sizing is critical, so when buying small-cap precious metals stocks, position sizes should be limited to 5% or less of one's portfolio.