Endeavour Silver green-lights 
construction at El Compas

Endeavour Silver (TSX: EDR; NYSE: EXK) plans to add a fourth mine to its Mexican operations, after an encouraging preliminary economic assessment (PEA) at its El Compas gold-silver project in Zacatecas state.

The miner operates three underground silver-gold mines: Guanacevi in Durango state, and Bolanitos and El Cubo in Guanajuato state. Combined the three churned out 9.7 million equivalent oz. silver in 2016, in line with guidance.

The recent PEA outlines a small, low-cost operation at El Compas, with favourable economic returns. It also included an initial resource estimate.

El Compas has 2.9 million indicated equivalent oz. silver (148,400 tonnes at 616 equivalent oz. silver) and 3.2 million inferred equivalent oz. silver (216,800 tonnes at 453 equivalent oz. silver).

Endeavour Silver’s El Compas project in Zacatecas, Mexico. Credit: Oro Silver Resources (which Endeavour acquired in May 2016).

Although the resource is small, it is high grade and shallow, starting from surface to 150 metres deep. The resource — along with Endeavour’s leased mill, sitting within 20 km — has contributed to El Compas’ low start-up costs of US$10 million and life-of-mine sustaining costs of US$1.8 million. Endeavour, with a cash balance of US$72 million, intends to fund El Compas’ construction internally.

The study envisions El Compas as a 200-tonne-per-day underground operation, even though the mill has an initial capacity of 250 tonnes per day. As a condition of the lease, the company is reserving the 50-tonne balance to buy and process ore from small miners in the district. If those miners don’t have any feed, Endeavour is free to use the extra capacity. The PEA, however, has excluded this in the economic analysis.

Over its estimated 4.3-year mine life, El Compas should process 300,000 tonnes (200 tonnes a day) grading 86.4 grams silver per tonne and 6.3 grams gold, with recoveries averaging 73% silver and 83.5% gold.

Estimated life-of-mine production is 583,000 oz. silver and 49,400 oz. gold, or 4 million equivalent oz. silver. Annual output averages 939,760 equivalent oz. silver, with expected all-in sustaining costs of US$9.64 per equivalent oz. silver over the mine life.

El Compas has all its permits, except for the explosives permit, and is calling for more clarity on an exemption from the state’s new environmental tax.

The company has not said when it will receive the outstanding permit and tax clarity for developing El Compas.

Meghan Brown, the company’s director of investor relations, says in an email that Endeavour “cannot provide a time line, as these items are not within our control. Our construction time line once these are in place is six months.”

Despite the short construction period, Endeavour cautions that its decision to put El Compas into production based only on a PEA increases the technical and economic risks, but that it has the technical and financial capacity to manage such risks.

“We recognize that these risks are mitigated by the project’s low capex, short time line to production and Endeavour’s in-house experience,” Raymond James analyst Chris Thompson writes. He has a $5.50 price target and “market perform” rating on the stock.

Along with low capital requirements, the proposed mine has encouraging economics. Using US$18 per oz. silver and US$1,260 per oz. gold, which are around the current spot prices, El Compas would generate life-of-mine revenue of US$72.8 million and total free cash flow of US$16.5 million. The mine has a net present value of US$12.6 million and a 42% internal rate of return, both after taxes. Payback should take a little over two years.

Endeavour picked up El Compas and the plant lease in a US$6.7-million, all-share acquisition of Oro Silver Resources — a subsidiary of Canarc Resource (TSX: CCM) — last May.

El Compas is a classic low-sulphidation epithermal vein deposit. It has two veins ready for development (El Compas and El Orito) and 10 other vein targets for exploration.

“The operation is scalable, if we discover or buy more mineral resources in the Zacatecas district and refurbish the second ball mill to double the plant capacity to 500 tonnes per day,” Bradford Cooke, Endeavour’s CEO, said in a release.

Thompson forecasts that including El Compas will increase his estimate for Endeavour’s 2018 production  9%, from 10.1 million to 11 million equivalent oz. silver.

Endeavour hasn’t published its 2018 production guidance, but for this year aims to produce between 8.9 and 9.7 million equivalent oz. silver from its three Mexican mines.