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Endeavour Silver Corp: THE INVESTMENT CASE

Endeavour Silver shimmering with growth ambition for 2017

It expects output for the rest of the year to increase as it bids to bring two more mines in the country on stream
Endeavour Silver shimmering with growth ambition for 2017
INVESTMENT OVERVIEW: EDR The Big Picture
"We expect 2017 to be a transformative year for Endeavour as we move to develop two new mines," says the CEO

Endeavour Silver Corp (TSE:EDR, NYSE:EXK) saw shares nudge up in Toronto on Tuesday as it continues to make strides in the metal mining arena in Mexico.

Production may have been reduced in the first quarter due to challenges in 2016 and operational decisions on mine development but the miner is going full steam into 2017.

Output expected to rise.. 

It expects output for the rest of the year to increase as it bids to bring two more mines in the country, well known for its silver mining heritage, on stream.

This all comes when sentiment on precious metals is on the rise.

News has been plenty in recent months from the firm, led by chief executive Bradford Cooke, including PEAs (preliminary economic assessments) on two potential projects.

WATCH - Mexico producer Endeavour Silver turning the focus to growth

In the three months to March 31, silver production decreased 29%  to around 1.076 mln ounces compared to the same time in 2016, while gold output decreased 27% to 11,724 ounces.

Endeavour sold 18% fewer silver ounces compared to the first quarter last year and 26% less gold, it added

The production and sales data comes from the firm's three silver-gold mines in Mexico - the Guanacevi mine in Durango state and the Bolanitos and El Cubo mines also in Guanajuato state.

Notably, in 2016, production was highest in Q1 and lowest in Q4 due to the decision at low metal prices in January to cut spending on exploration and development at all three sites.

Today, chief executive Bradford Cooke told investors: "Our plan is to increase production throughout the year as we improve ore grade controls at El Cubo, slowly return Guanacevi to good health, optimize throughput at Bolanitos and regain access to reserves at each mine in order to achieve our production guidance.

"We expect 2017 to be a transformative year for Endeavour as we move to develop two new mines.

"We recently made a decision to develop the El Compas as our fourth mine and we look forward to giving the green light soon to develop Terronera into our fifth mine.

"The emergence of our exciting new Terronera discovery and the acquisition of the El Compas and Parral mine projects have positioned us for significant growth over the next three years."

A fourth and a fifth mine.....

In late March, the  group fired the starting trigger on developing a fourth mine in Mexico - a small, but high grade project, with robust returns - the El Compas mine in Zacatecas state.

The mine is fully permitted, and will process 300,000 tonnes over its 4.3 year mine life grading 86.4 grams per tonne (gpt) silver and 6.3 gpt gold and recovering 73% of the silver and 83.5% of the gold.

At the base case of $18 per ounce silver and $1,260 per ounce of gold, the mine will produce life of mine revenue of $72.8 million, EBITDA (underlying earnings) of $38.4 million and total free cash flow of $16.5 million.

Operating costs were put at $69.80 per tonne for mining, $26.20 per tonne for processing, and $14 per tonne for general and administration, for a total cost excluding royalties of $110 per tonne.

Using a base case scenario, all in-sustaining costs are estimated to be $9.64 per silver equivalent ounce (Ag Eq Oz) over the life of the project.

Then, this month, it has fleshed out the detail of a potential fifth mine, when  a PEA  put the net present value of its Terronera project at $78.2 million.

The initial production rate is 1,000 tpd (tonnes per day) during the first two years of operations, expanding to 2,000 tpd in the third year.

This project is expected to generate LOM (life of mine) revenue of $639.5 mln, underlying earnings (EBITDA) of $347.3mln and total free cash flow of $125.3mln.

The anticipated after tax internal rate of return (IRR) is 21% and payback of capital is 4.3 years, using base case assumptions of $18 per ounce silver and $1,260 per ounce of gold.

Initial capital expenditure is estimated at $69.2 million, while the spend for the phase 2 expansion from 1,000 tpd to 2,000 tpd has been assessed at $35.5 million.

In January the miner said it expected silver production in 2017 to be in the range of 5.2 million to 5.7 million ounces and gold production is expected be in the 50,000-to-53,000-ounce range.

What the broker says...

Broker Rodman has repeated a 'buy' on the company, which it says boasts a "strong pipeline of development stage assets".

Notably, these are its El Compas and Terronera mine projects in Mexico.

The latter (Terronera), which the broker reckons will get the green light from management shortly, "could catapult Endeavour" due to its potential to increase production rates greater than 50% over the next three years", says the broker.

It could mark an 'inflection point' for the miner, it adds.

The broker's price target is US$6.50 a share, against a current price in New York of US$3.42..

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