‘It pays to be prudent,’ miners say

Endeavour Silver Corp. (EDR-T, EXK-N) and Osisko Mining (OSK-T) became the latest companies to unveil cost-cutting measures this week—and both on the same day—as volatile markets and precious metal prices continue to bite into the bottom line of miners across the industry.

Osisko said after a review of its rate of discretionary spending in exploration and advancing new projects that it has come up with a plan to cut over $80 million this year from a total budget of about $220 million, while Endeavour Silver said it is deferring 20% of its planned capital investments as non-essential in 2013 and cutting non-core exploration expenditures by 25%.

Endeavour Silver says it will reduce mine operating costs by layoffs in both operations and exploration and that directors and management have agreed to defer 10% of their cash compensation.

“Endeavour management successfully cut costs across the board through a similar market downturn in 2008 and the company emerged financially stronger and more profitable as a result,” president and chief executive Brad Cooke said in a prepared statement. “It pays to be prudent at times like this.”

Endeavour also emphasized that none of its cost cutting measures this year would “negatively impact” its mine plan or forecasted silver production in 2013.

At Osisko, the company said work at its Upper Beaver development project in Ontario will be limited to completing its current holes and construction of the head frame and surface facilities will be delayed, as will the shaft sinking. In total, the company says it can defer about $50 million in planned outlays of about $70 million budgeted for the project this year.

At the same time, it will reduce drilling activities on regional targets at its Kirkland Lake-Larder camp and cut expenditure at Hammond Reef near Thunder Bay in northern Ontario by about $3.5 million to $6.5 million. It also noted that it won’t advance the project further until it completes its feasibility study later this year.

In addition, Osisko says it will cut its budget in half at its exploration project in Mexico by reducing drilling and exploration and cut the company’s overall workforce by about 6% over the next few months.

Sean Roosen, Osisko’s president and chief executive, said the recent decline in the gold price has caused management to focus its efforts, noting that having full ownership of its major projects allowed it “to adapt our investment spend rate and preserve the free cash flow” generated by its flagship Canadian Malartic mine in the Abitibi region of Quebec, south of the town of Malartic. 

Commercial production at the Malartic mine began in May 2011, and the deposit is one of the biggest gold reserves in production in the country, with proven and probable reserves of 10.11 million ounces of gold.

John Hayes of BMO Capital Markets said in his view Osisko “is placing clear priority on Canadian Malartic and working to mitigate the impact of a volatile gold price.” Hayes noted that Osisko’s shares are trading at a 46% discount to his 10% net asset value estimate of $7.49 per share, “significantly below the intermediate producers in BMO Research’s coverage universe, which trade, on average, at a 2% premium.”