High costs leach revenues at Endeavour Silver (May 12, 2008)

Endeavour Silver (EDR-T, EXK-X) posted record production and revenue last year, but escalating cash costs and a US$1.3-million write down from soured investments in asset-backed commercial paper, ate away at the company’s bottom line, leaving it with a loss of US$12.2 million, or 27 per share.

The news didn’t move the markets much in either direction, however. The stock closed down 3 a share on the news to $3.63 on a trading volume of 144,023. The stock has a 52-week window of $2.90-$6.09.

Disheartening as the loss may have been, the company’s spirits remained buoyed by the fact that it continued to set records — this time for the fourth consecutive year — in annual sales, production and mine reserves.

Revenues soared 106% year-on-year to US$32.2 million. That was due to both escalating silver production at its first and largest operation, the Guanacevi mine in Guanajuato, Mexico, and its acquisition of the Guanajuato mine project in Guanajuato, Mexico.

Production in 2007 rose to 2.1 million oz., a 58% increase over 2006. At the same time, Endeavour enjoyed higher silver prices, which averaged US$13.23 per oz., a year-on-year gain of 28%.

Conspiring against the small-cap silver mining company were rising costs for labour, energy, equipment and supplies. The cost of sales spiked to US$24.3 million, meaning cash costs averaged US$9.38 per oz.net of gold credits — a 43% increase over 2006.

Cash costs at Guanacevi mine alone rose 25% to US$8.16 per oz. Labour, new mine equipment, and the expansion of the plant’s milling circuit all contributed to the higher expenses.

Moreover, ore grades dropped due to excessive mine dilution and the processing of lower grade ore stockpiles. In addition, metal recoveries fell because of higher manganese content in the ore, shorter retention times in the leach circuit and delays in the plant’s upgrade projects.

At Guanajuato, where cash costs were “marginal” when Endeavour purchased the mine in the second quarter, Endeavour had to clean up old underground workings and complete safety and environmental upgrades. That sent cash costs surging to US$20.06 per oz.

Other expenses included drilling at Greenfield projects including Parral, 210 km south of Chihuahua City and 110 km north of the Guanacevi mine, and Arroyo Seco, in southeastern Michoacan. Stock-based compensation also rose, as new stock options were offered to woo senior management.

On other fronts, the company’s proven and probable reserves jumped 50% to 14.9 million oz. silver and the combined silver equivalent reserves and resources (including gold at a 1-to- 55, gold-to-silver ratio, but not including base metals) climbed 11% to 50 million oz.

The company said the “most exciting new development,” however, was the discovery of a new polymetallic mineralized zone in the Cometa vein, part of the Parral project. The new zone is not rich in silver, but it contains substantial zinc, lead and gold values, the company said.

This year Endeavour forecasts it will serve up its fifth consecutive year of growth and expand silver production 22% year on year to 2.6 million oz. or more. Cash costs are forecast to average US$8 per oz. or lower.